Recession, interest rate hikes hamper global income growth in 2023

© Reuters. A member of the military walks around Times Square during the 103rd Annual Veterans Day Parade in New York City, U.S., November 11, 2022. REUTERS/Eduardo Munoz

By Caroline Valetkevitch and Joice Alves

NEW YORK/LONDON (Reuters) – Corporate earnings growth is expected to slow next year in many countries as higher inflation and rising interest rates take an even bigger hit and companies prepare for the possibility of a global recession.

US companies are forecast to have their slowest full-year profit growth since 2020 and the start of the coronavirus pandemic. Some of the top equity strategists predict returns will not grow or even decline in earnings.

Investors have been watching for bearish estimates in recent months. Fourth-quarter 2022 earnings are now expected to fall 1.1% year-on-year, which would be the first drop in quarterly earnings since Q3 2020, according to IBES data from Refinitiv calculated. to Friday.

For the US benchmark S&P 500 index, analysts are predicting full-year 2023 earnings growth of 4.7% following an estimated 5.7% growth for full year 2022, based on data. by Refinitiv.

Jonathan Golub, director of US equity strategy at Credit Suisse Securities in New York, recently lowered his earnings forecast and thinks annual S&P 500 earnings will decline in 2023.

“Everything is about inflation,” he said. “Companies’ pricing power is about inflation, and their wage costs are inflationary.”

Last Wednesday, the US Federal Reserve raised interest rates by 50 basis points as expected to combat inflation and Fed Chairman Jerome Powell predicted more rate hikes next year as soon as possible. even when the economy may fall into a recession.

The S&P 500 is down about 20% this year after falling into the second bear market since the 2020 global sell-off caused by the pandemic.

According to Refinitiv data, the S&P 500 12-month price-to-earnings ratio fell from 22 to about 17 at the end of December 2021, but is still about 16 above its long-term average.

With valuations largely dependent on whether the Fed can make a “soft landing,” said Keith Buchanan, senior portfolio manager at Globalt Investments.

The S&P 500 consumer discretionary sector is expected to have the highest annual earnings growth in 2023, with a gain of 30.3%, while the energy sector is expected to have a biggest decrease in annual income.

Rising interest rates have particularly hit tech and other growth stocks this year. Tech sector earnings are expected to grow only 4.3% in 2023 from 2022, and Golub and others say that may be too optimistic.

Morgan Stanley (NYSE:)’s director of US equity strategy, Michael Wilson, warned in a note on Monday that “the market is not always efficient in pricing large earnings declines.” before they arrive.”

EUROPEAN INCOME SET UP FOR A CLEAR COOL Corporate earnings in Europe are forecast to plummet in 2023 after a strong couple of years since the pandemic took hold. Many companies listed on regional indexes have been able to pass costs higher through price increases. But any global recession would put pressure on consumers, and rising interest rates could create a challenging environment for businesses. Barclays (LON:) European head of equity strategy, Emmanuel Cau, expects earnings to create a headwind for equities. The Bank of Great Britain saw earnings per share growth fall by 12%. “After two and a half years of very strong earnings recovery, the underlying effects will be much tougher in 2023,” he said. “Our analysis shows that both earnings and margins generally decline when global GDP (gross domestic product) growth runs below trend.” Companies in the STOXX 600 are expected to report a roughly 8% increase in earnings for the first quarter of 2023, based on Refinitiv IBES data on Friday. But they are expected to fall 4% in Q2 2023, which would be the first quarterly decline since Q4 2020. But Mark Nichols and Mark Heslop, investment managers at European equities Jupiter’s Europe, said that while the economic outlook in Europe is challenging, “the company’s outlook has some reason to be optimistic.” They mentioned increased mobility in the world’s second-largest economy, signs of easing supply disruptions and massive investment to tackle climate change. Jefferies strategists say any degree of stabilization in energy prices would have a major impact on European companies’ profits, reducing real household incomes. “Since there’s still pent-up demand, this should deliver sizable earnings surprises.”

In Japan, strategists expect lower interest rates or higher economic growth to improve the outlook for corporate profits. In a recent Reuters poll, they said the average of 225 stocks will rise to 30,000 next year, the first time since September 2021.

Based on a Reuters analysis using 5,756 companies globally, with a market capitalization of at least $1 billion each, earnings growth is expected to slow to around 4.0% in 2020. 2023 from 4.9% in 2022.

BlackRock (NYSE:NYSE) in its 2023 global outlook report said earnings expectations remain undervalued during a recession.

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