US Key Companies' Earnings at 'Corona Shock' Level

S&P 500 Companies' Q4 Net Profit Down 5.3% Year-on-Year

[Asia Economy Reporter Yujin Jo] As the US earnings season has passed its peak, an analysis has emerged that the fourth-quarter earnings of key US companies last year have returned to the level of two years ago when the COVID-19 pandemic caused a collapse. With economic uncertainties still present and major economic indicators used to gauge earnings trends showing no signs of improvement, it is expected that the sluggish earnings trend will continue this year as well.

On the 5th (local time), market research firm FactSet announced that among S&P 500 companies, the net profit of 252 companies that have reported earnings in the fourth quarter of last year decreased by an average of 5.3% compared to the same period last year. FactSet analyzed that this is at the level of the third quarter of 2020, when both domestic demand and exports shrank due to operational shutdowns, resulting in shock-level earnings. The total net profit of these companies was on average 0.6% higher than market expectations but recorded a level 8.6% lower than the average of the past five years. John Butters, FactSet's chief analyst, pointed out, "This means that the earnings surprise rate compared to market expectations among S&P 500 companies was only 0.6%, the lowest level since 2008."

Major foreign media viewed that demand is rapidly decreasing due to recession, while costs are sharply rising due to intensified US-China conflicts and the Ukraine war, putting pressure on the profitability of companies and the overall economy. The credit crunch phase, where funds are not circulating due to higher interest rates, is also adversely affecting companies' borrowing environment. Analyst Butters predicted, "Although the earnings season is entering its latter half, it will be difficult for the earnings already announced and those remaining to escape below-average performance."

[Image source=AP Yonhap News]

By industry, except for energy and utilities, most sectors experienced significant profit declines. Apple, the largest US market cap company and leader of big tech, posted a revenue decline of 5% in the fourth quarter of last year, a negative growth shock, and net profit also decreased by 13%, falling short of Wall Street expectations. This is the first time in six years since 2016 that Apple's net profit missed market expectations. Alphabet, the parent company of the world's largest search engine Google, also saw both revenue and net profit decline as its digital advertising business was hit. Amazon's net profit also fell 16% year-over-year to $12 billion.

Banks also experienced significant profit declines. Wells Fargo's net profit in the fourth quarter of last year was $2.864 billion, halving compared to $5.75 billion in the same period last year. Citigroup and Goldman Sachs also saw large profit declines. Goldman Sachs recorded earnings per share of $3.32 in the fourth quarter of last year, 39% lower than the market expectation of $5.48, marking the largest earnings miss since the third quarter of 2011.

The poor earnings were directly reflected in stock prices, with S&P 500 companies' stock prices falling an average of 20% last year. However, expectations that central banks' interest rate hikes are entering their final phase have led to a recovery this year. With hopes for a soft landing supported by positive economic indicators such as GDP growth, the stock prices of economically sensitive sectors rebounded strongly, and individual stock gains were boosted by shareholder return plans announced by oil giants that benefited from last year's energy price increases, attracting investor sentiment.

Outlooks for this year's earnings are mixed. While coincident indicators such as retail sales are declining, the recovery in leading indicators like sentiment indices is positive. However, since the producer price inflation rate, which helps gauge earnings trends, is slowing, some forecasts suggest it is still too early to expect earnings to have bottomed out. Experts also place weight on continued downward earnings revisions. In a survey conducted by the National Association for Business Economics (NABE), 52% of responding economists expected a recession within this year, and 3% said a recession has already begun.