Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!

Q1 Earnings From Bad To Dismal: Tech Earnings Sliding, Guidance Collapsing

Courtesy of ZeroHedge View original post here.

With tech titans and the market's two most important generals, Google and Microsoft, both set to report in a few hours after the close, and with traders clearly dreading the number about to be revealed (both companies are down about 3% trading at session lows), we take this opportunity to look at what the first week of earnings reveals and what may be in store for the rest of this all-important earnings season (all-important, because with Fed hiking and multiples contracting, the only upside left to stocks is earnings, historical and especially projected). Unfortunately, as Bank of America makes clear, it's an ugly picture and about to get even worse.

As BofA quant Savita Subramanian writes in her post-mortem to the second week of earnings…

… so far some 100 S&P 500 companies representing 24% of earnings have reported. Consensus 1Q EPS has risen 1% since April 1, to $52.29 (+6% YoY).

The good news is that the 51% beat on both sales & EPS, in-line with last quarter’s trends at Week 2.

The bad news, however, is that the guidance in April is tracking the weakest since Feb 2020…

…. and downward guides (13 stocks so far) have lagged by an outsized 4.6ppt on avg. the next day (-1.9ppt ex. NFLX).  And while Q1 EPS will likely beat – BofA pencils in +4% – the longer-term ‘22-23 EPS outlook is already being trimmed.

In light of today's dismal performance among tech names, it will come as no surprise that the biggest concern for BofA is the "Tech perfect storm" due to competition and less access to capital.

As Subramanian shows, last quarter revealed that Growth stocks’ punishment was not just driven by sentiment around rising rates, but by weakening fundamentals. And sure enough, revisions in the Nasdaq continue to track weaker than the S&P 500 this quarter. 

Since the end of 3Q21, 2022 earnings estimates for NDX fell 0.4%, while estimates for the S&P 500 rose 4.3%, indicating weaker fundamentals for Growth stocks relative to the overall market; it has also meant that growth stocks have underperformed value stocks by 14% YTD.

Why? One reason is that increased competition is now weighing on streaming, social media and other parts of Tech Media Telecom (TMT). At the same time, a higher discount rate is hurting companies that need capital to innovate/compete, where the ultra-low rate environment until now had enabled frictionless investment in growth.

Moving away from the biggest wildcard sector of this quarter's earnings season, BofA next looks at the biggest dynamo propping up the US economy, the US consumer responsible for 70% of US GDP, which has remained remarkably strong post-COVID, evidenced by Banks’ and Airlines’ earnings, with BofA card data pointing to " surprising resilience" in low-income consumer, bolstered by a surge in wages and above average savings cushions. But yellow lights are starting to flash: falling home sales, mortgage applications and used car prices indicate weakness in big ticket spend, in only some cases driven by inventory shortage. Meanwhile, the BofA Truckload Demand Indicator also sharply fell to a near freight recession level.

Another way of thinking about this is that "big stuff is getting worse, while small stuff is getting better" – indeed, while the service sector is benefiting from pent-up demand, demand for goods is starting to cool, particularly in big ticket items as higher rates hurt affordability. Since February, 2022 consensus sales for big ticket items (autos ex-TSLA & housing) fell 0.2% vs. +1.2% for services

BofA expects the shift from goods to services to accelerate this year, especially as big ticket item demand slows, which is a headwind for S&P EPS that is more geared towards goods (50% goods) than the overall US economy (20% goods). Worse, a deceleration in goods spend plus weakening Tech/TMT drive our expectation for S&P sales to lag nominal GDP (+10%) by about 1%.

Marginal Disappointment

If that wasn't enough, Wall Street's mass delusion has steuck again, and despite soaring input, labor and wage costs, consensus somehow sees corporate margins rising to a new all time high in Q2.

That ain't going to happen: BofA's Corporate Misery Indicator, the bank's macro indicator for profit environment, slightly improved QoQ but remains well off its highs, suggesting a similar margin environment in 1Q. Consistently, consensus margins for 1Q point to flattish margins QoQ. Here BofA agrees with us and notes that "despite increased cost pressure, analysts continue to expect S&P net margins (ex-Fins) reaching new highs by 2Q, which we believe is overly optimistic and continue to see downside risks to consensus earnings."

Guiding for pain

We next go back to the biggest risk for disappointing earnings: slumping guidance. Because while sellside analysts may see another quarter of record margins, management teams do not. According to BofA calculations, the 3 month guidance ratio (# of above- vs. below-consensus guidance) fell sharply to 0.6x so far in April, the lowest level since May 2020. Real Estate is the only sectors with over 1.0x 3-mo. ratio (that' because Energy had no EPS guidance). Similarly, BofA' Earnings Revision Ratio also sharply fell to 0.9x in March.

Moreover, and similar to what happened during the covid crash, the bank sees signs of information vacuum amid rising uncertainty: guidance instances fell to the lowest level in March history, as companies’ earnings visibility has diminished. Finally, while estimate dispersion narrowed in 1Q, BofA sees risk of widening dispersion after 1Q earnings, potentially leading to higher equity risk premium.

Do you know someone who would benefit from this information? We can send your friend a strictly confidential, one-time email telling them about this information. Your privacy and your friend's privacy is your business... no spam! Click here and tell a friend!

You must be logged in to make a comment.
You can sign up for a membership or get a FREE Daily News membership or log in

Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!