Why an economic slowdown could be a nightmare for corporate earnings in 2023: Morning Brief – Yahoo Finance


- Advertisement -

This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Wednesday, November 23, 2022
Today's newsletter is by Sam Ro, the author of TKer.co. Follow him on Twitter at @SamRo. Read this and more market news on the go with Yahoo Finance App.
Revenue — aka the "top line" — doesn’t have to deteriorate by much for earnings to really suffer.
“[A]t the end of the day it's typically margins that do the heavy lifting to the downside in an earnings recession, not top line growth, because of the power of negative operating leverage,” Mike Wilson, chief U.S. equity strategist at Morgan Stanley, wrote on Monday.
Operating leverage is the degree to which the change in revenue translates into operating earnings. For example, a company with 5% sales growth and 15% earnings growth has higher operating leverage than a company with 5% sales growth and 10% earnings growth. And it cuts both ways: A company with high operating leverage will see earnings fall faster as sales decline.
Companies with a lot of fixed costs relative to variable costs tend to experience high operating leverage.
Wilson offered a little more color on his current view on operating leverage in a Nov. 7 research note (emphasis added):
… our economists are not officially forecasting a recession for next year, but they assume we barely skirt one. As we have noted, from an earnings standpoint, that may be worse because it means companies are not reducing headcounts as they typically do when revenue growth slows. That will put even more pressure on margins as the rate of change on real growth and inflation – i.e., nominal GDP – fall sharply. In other words, the decline in the rate of change in revenue growth overwhelms the ability of companies to adjust fast enough to avoid the negative operating leverage that is driving our well-below consensus EPS forecasts for next year. The shortage of labor created by the lockdowns and de-globalization is reducing companies' willingness to let employees go for fear of never getting them back. This is a new dynamic that US equity investors haven't had to contemplate over the past 30 years when labor was much more fungible and cheap.
Labor represents a massive cost for companies. And so when demand cools, it would make sense for companies to lay off employees to lower costs as the amount of work that needs doing shrinks.
However, the past two years have come with persistent labor shortages as companies struggled to hire amid the rapid economic recovery. Because they didn’t have the capacity to keep up with demand, companies missed out on sales opportunities.
This dynamic has led some economists to speculate that companies would be incentivized to engage in “labor hoarding” or hang on to workers despite slowing demand. The idea is to make sure you are well-staffed for when demand eventually recovers.
The downside is labor costs don’t come down as sales deteriorate, putting outsized pressure on earnings in the near term.
This is the negative operating leverage Wilson is talking about.
And it’s why he expects S&P 500 earnings per share (EPS) to tumble to $195 in 2023 from about $219 this year. According to FactSet, the Wall Street consensus estimate is for earnings to rise to $232.
The good news is Wilson sees this deterioration in profitability as a short term problem.
“While we see 2023 as a very challenging year for earnings growth, 2024 should be the opposite — a rebound growth year where positive operating leverage resumes — i.e., the next boom,” he wrote.
With that boom, he estimates EPS to jump to $241 in 2024.
Editor's note: There will be no Morning Brief published on Thursday, November 24. We'll return to our normal publishing schedule on Friday, November 25.
7:00 a.m. ET: MBA Mortgage Applications, week ended Nov. 18 (2.7% during prior week)
8:30 a.m. ET: Durable Goods Orders, October preliminary (0.4% expected, 0.4% during prior month)
8:30 a.m. ET: Durables Excluding Transportation, October preliminary (0.0% expected, -0.5% during prior month)
8:30 a.m. ET: Initial Jobless Claims, week ended Nov. 19 (225,000 expected, 222,000 during prior week)
8:30 a.m. ET: Continuing Claims, week ended Nov. 12 (1.520 million during prior week)
9:45 a.m. ET: S&P Global U.S. Manufacturing PMI, November preliminary (50.0 expected, 50.4 during prior month)
9:45 a.m. ET: S&P Global U.S. Services PMI, November preliminary (48.0 expected, 47.8 during prior month)
10:00 a.m. ET: University of Michigan Consumer Sentiment, November final (55.0 expected, 54.7 prior)
10:00 a.m. ET: New Home Sales, October (570,000 expected, 603,000 during prior month)
10:00 a.m. ET: New Home Sales, month-over-month, October (-5.5% expected, -10.9% during prior month)
2:00 p.m. ET: FOMC Meeting Minutes, November 1-2
Deere (DE), SentinelOne (S)
Click here for the latest stock market news and in-depth analysis, including events that move stocks
Read the latest financial and business news from Yahoo Finance
Download the Yahoo Finance app for Apple or Android
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube
S&P Global said on Wednesday its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, fell to 46.3 this month from a final reading of 48.2 in October. A reading below 50 indicates contraction in the private sector. Activity is slumping under the weight of the Federal Reserve's most aggressive interest rate-hiking cycle since the 1980s aimed at curbing inflation by dampening economic demand.
Stocks were higher Wednesday morning amid a rush of economic data and a sharp drop in the price of oil.
Tesla stock woes have caught the attention of one noted Wall Street bear on the EV maker.
WASHINGTON (Reuters) -The number of Americans filing new claims for unemployment benefits increased to a three-month high last week amid rising layoffs in the technology sector, but that likely does not suggest a material shift in labor market conditions, which remain tight. Weekly jobless claims data tend to be volatile around the start of the holiday season. Despite the increase in filing reported by the Labor Department on Wednesday, claims remained well below the threshold that economist said would raise red flags about the labor market.
Amazon.com Inc. (NASDAQ: AMZN) founder Jeff Bezos has been making his predictions for the U.S. economy clear. The billionaire told his followers on Twitter to “batten down the hatches” last month in response to a CNBC clip of Goldman Sachs CEO David Solomon predicting there’s a good chance of a recession. Bezos reiterated his predictions earlier this month during an interview with CNN saying, “The probabilities say if we’re not in a recession right now, we’re likely to be in one very soon.” He w
On Tuesday, the Biden administration finalized a series of rules that will make it easier for employers to include so-called impact investment funds in their retirement plans. Specifically, the Department of Labor will no longer ban employers and advisors from … Continue reading → The post Trump Loses His Clutch on Your 401(k) in Department of Labor Ruling appeared first on SmartAsset Blog.
A face of the regime of Sam Bankman-Fried, the founder of FTX, was revealed on November 22 during the firm's first hearing in Delaware bankruptcy court. The 30-year-old former trader was virtually considered an "emperor" among his employees: This is the image used by an FTX lawyer to describe what happened after Bankman-Fried filed for Chapter 11 bankruptcy on his crypto empire made up of FTX and Alameda Research. Everyone realized for the "first time the emperor had no clothes," James Bromley, co-head of the restructuring practice at law firm Sullivan & Cromwell, told Judge John Dorsey.
These upwardly mobile talents were selected from a field of 150 applicants to participate in Climbing's photo-mentorship program, taught by pro photographers Irene Yee, Randall Levensaler, David Clifford and Duane Raleigh.
The national median monthly payment increased 3.7% to $2,012 in October from $1,941 in September.
Here's the trading schedule for stocks and the bond market as investors prepare for Thanksgiving.
After at least a decade of expansion, tech companies have been rattled by inflation along with a slowdown in spending from both consumers and advertisers.
The two-hour hearing was a traditional measure meant to authorize FTX’s requests to pay its advisors, employees, and vendors.
HP Inc. served up a weak outlook as the PC correction rages on.
The London-based investment firm told a special committee of News Corp's board last month that it thinks a combination on its own would fail to realize the full value of the company, according to the Wall Street Journal, which first reported the news earlier in the day. Independent, which owns about 7% of News Corp's Class A shares and 6.4% in Fox Corp, is the second investor to express dissent over the plan.
Elon Musk has evolved in a world apart. For more than 10 months he was the only member of the most select financial club on the planet, one that has never welcomed more than two members at the same time. The Tesla CEO and owner of microblogging website Twitter was a regular member there for the past few months — until he was ousted a few weeks ago.
It’s difficult to put a positive spin on the current state of the stock market. While 2022’s action has seen moments of relief, for the most part, the trend has been resolutely downbeat, as reflected in the main indexes’ performances. All are down by at least double-digits; the tech-heavy NASDAQ’s 30% drop has been the most acute, while the S&P 500 now sits 17% lower year-to-date. That said, while it’s hard to watch any owned stock sink to the bottom, the upside to the downside is that investors
(Bloomberg) — Sam Bankman-Fried, disgraced founder of the now collapsed crypto exchange FTX and trading house Alameda Research, apologized to staff in a letter that outlined a crash in “collateral” to $9 billion from $60 billion.Most Read from BloombergElizabeth Holmes Judge Proposes Texas Prison Camp, Family VisitsTrump Had Losses of $900 Million in Two Years, Jury ToldHow Bad Will Housing Get? The Chill Gripping a Once-Hot Market Offers a TestBankman-Fried Says Collateral Crashed by $51 Billi
Notable business headlines include a Walmart shooting in Virginia that left six people and the assailant dead, Credit Suisse flagging a fourth-quarter loss of up to $1.6 billion, and a judge suggesting Elizabeth Holmes serve her sentence in a Texas prison camp.
(Reuters) -French caterer Elior beat sales expectations on Wednesday and forecast a quick return to profitable growth after a third straight annual loss, sending its shares up 10%. Alphavalue analyst Yi Zhong said the update should be enough to ease investor concerns after a discouraging forecast from the world's largest catering group Compass on Monday. Elior, like peers Compass and Sodexo, is renegotiating rates and supplier pacts, reining in costs and cutting menu options to cope with rising energy and food prices.
Yahoo Finance Live anchors break down October U.S. manufacturing activity data.


- Advertisement -


Please enter your comment!
Please enter your name here

Share post:




More like this

Ghana, creditor panel agree on debt restructuring, paving way for IMF cash

Ghana has finalised a pact with its official creditor...

Nigeria strikes deal with Shell to supply $3.8 billion methanol project

Nigeria has struck a deal for Shell (SHEL.L), opens new...

Africa’s $824 billion debt burden and opaque resource-backed loans hinder its potential, AfDB president warns

Africa's immense economic potential is being undermined by non-transparent...

IMF: South Africa needs decisive efforts to cut spending

South Africa needs more decisive efforts to cut spending...