Companies have been issuing pessimistic forecasts about their earnings recently. It should make investors wonder whether the stock market can keep moving higher.
The actual results for the fourth quarter, which began pouring in in earnest in early January, have been decent. Aggregate sales for
companies that have reported have beaten analysts’ estimates by 1.4%, according to Evercore. Excluding the impact of banks and other financial companies, which dealt with large, one-time expenses, aggregate earnings per share have exceeded expectations by a similar amount as revenue.
But corporate managements have sounded negative about what comes next.
For the reporting season through Thursday, 75 S&P 500 companies lowered their financial forecasts before releasing their results, according to
while just 37 companies made positive preannouncements. That ratio of about 2 to 1 isn’t necessarily out of whack versus history, but it certainly doesn’t indicate that companies are becoming increasingly confident about their profits.
What is more, several companies that didn’t make preannouncements have sounded somewhat downbeat about their performance for the rest of the year.
a chip maker that sells to lots of different industries, told analysts to expect sales of $3.6 billion for the current quarter, which is 11% below the prior consensus call on Wall Street.
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Management said demand from auto manufacturers and other industrial customers has weakened as higher interest rates force consumers to cut back. That spells trouble for profits because the company likely isn’t able to cut costs correspondingly. Analysts have built lower profit margins into their financial forecasts, reducing their projections for EPS for the current quarter by 24% since the end of December, according to FactSet.
Elsewhere,
Alphabet
,
which continues to grow sales through its multiple businesses, said “we remain focused on sustaining healthy growth on this larger [revenue] base,” on its earnings.
Given that some areas of its advertising business outside of YouTube achieved only single-digit increases in revenue in the fourth quarter, the concern is that the company is implying that revenue growth overall may be slowing down. Responding to the company’s comment, Evercore analyst Mark Mahaney wrote, “Translation: be careful what revenue growth you are assuming—you need to respect the large numbers law.”
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Both stocks, which had been rising for months before their earnings disclosures, are down since the numbers came out.
These are negative signals for the stock market, which is vulnerable because it has risen 18% from a late October low point, reflecting what could turn out to be excessive optimism about earnings. Other stocks could be next to fall.
Apple
,
and
are due to announce their results after the close on Thursday. Those will be important reports for the entire index.
Write to Jacob Sonenshine at [email protected]
