A rather antiquated phrase, with more resonance on this side of the Atlantic, “after the Lord Mayor’s show comes a dustcart”, could well apply to expectations for the first quarter earnings season in the US. The phrase refers to the wagon that would follow the Lord Mayor’s parade in days gone by to clean up the deposits made by equine participants. After the COVID-induced earnings strength of recent history, it was clear that the parade could not last forever and this was expected to be the quarter where the trend finally came to an end.
With the end of the reporting season largely behind us – over 95% of the S&P 500 have now reported results – we can assess the state of the income statements of corporate America. This quarter, as usual, the focus was on income statements. Despite the ructions of the mini banking crisis in March, balance sheets are intact with the impact of higher interest rates yet to be reflected in corporate gearing. Many companies took advantage of ultra-low interest rates during the pandemic to refinance and extend maturities into the middle of the decade and therefore have not been exposed to the full effects of the near-global monetary tightening cycle.
In aggregate, earnings exceeded expectations. At the beginning of the quarter, the market expected earnings to decline by 6.7% with the actual decline rate being 2.2%1. Clearly a smaller negative is not a positive, but an earnings decline of 2.2% is not a harbinger of economic doom. This was largely driven by revenue growth as companies were able to price for inflation to an extent.
The decline in aggregate earnings has therefore been driven by margin contraction, largely as a result of inflation.
After a record year for share buybacks in 20222, any attempts by management to conserve cash by spending less on purchasing their own shares will take a few quarters to be reflected in the earnings per share (EPS) denominator. That is, if they choose to. Jamie Dimon, CEO of JP Morgan, clarified that the company had not paused their buyback stating that “(w)e also like to buy our stock when it's cheap, not just when it's available” with the caveat that caution abounds.
On a sector basis, the technology companies that dominate the market capitalisation of the index yet again drove aggregate growth. The results of Microsoft in particular gave the market some relief but were no match for the strength of the Nvidia results, released on Wednesday. The results were driven by AI investment, with the company being perhaps the most direct beneficiary of this trend. We have been struck by the revenue generative applications of AI demonstrated by companies in sectors as diverse as pharmaceuticals and media. It also appears that the negativity of the market towards the economically sensitive consumer sectors may be premature, with some of the largest earnings beats in the index seen in this sector. This may be a result of recency bias with the Bank of America Institute’s Consumer Checkpoint3 for the month of March showing that consumer spending marginally declined after a positive, but muted, start to the year.
In summary, this quarter was nowhere near as bad as feared and it is a truism in financial markets that money is not made by trading consensus. The S&P 500 has made a small, but positive, return since the unofficial beginning of the earnings season despite the uncertainty caused by debt ceiling negotiations.
However, prudence is clear in the guidance for future earnings. Negative downgrades to guidance are in line with the five-year average but this is against a backdrop of conservatism witnessed over the past twelve months. Whilst the dustcart is not yet being driven through financial markets, it may be some time before we are able to take part in another Lord Mayor’s show.
 S&P Global
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