S&P Profits to Take a Hit, Warns JPMorgan

JPMorgan, a stalwart of financial projections, is sounding the alarm, warning that corporate earnings are set to face fierce headwinds over the impending quarters as the euphoric effects of the Covid-19 distortions wane.

A Gloomy Outlook

The fourth quarter reporting season is unveiling a disheartening picture, revealing feeble earnings performance amid softening pricing indicators and timid corporate guidance, as a consequence of mounting supply disruptions.

“The lack of visibility regarding the consumer outlook, given some tough comps,” JPMorgan analysts lamented in an Equity Strategy report published on Monday, adding to the gloom.

The hurdle rate – the baseline return on an investment – has taken a nosedive, further exacerbating the plight.

Diminished Projections

The prognosis for the S&P 500 (SP500), (SPY), (IVV), (VOO) paints a grim picture, with anticipated earnings per share (EPS) plummeting by a staggering $4 compared to the third quarter. Year-over-year percentage growth has also dwindled from an impressive 10% to a meager 2%, according to JPMorgan analysts.

“The problem is that the market really needs some net earnings upgrades to advance from current levels, not just the beats versus heavily lowered projections, in our view,” the analysts wrote with a tinge of frustration. This is due to the fact that the present investor positioning is significantly loftier than last year, sentiment is smug, valuation multiples have been revised, and the driving force behind the Q4 rally – the dip in bond yields – seems to have run its course for the time being.

On top of that, in previous reporting periods, outperforming earnings were not rewarded with improved market performance. The average stock in the S&P 500 that surpassed estimates is now down by 1% compared to that day.

EPS forecasts for 2024 are spiraling downwards, and weekly EPS revisions are consistently pessimistic.

Looming Challenges

“This is unlikely to change,” the report forewarned. “We see risks to both pricing and volumes for this year, in addition to what is generally a strenuous hurdle rate for most corporations – profit margins are at historical highs, with nearly 75% of them exuding higher margins than pre-Covid times.”

Analysts anticipate profit margins softening towards their long-term norms in semiconductors (SMH), automobiles, and banks (KBE), all of which are currently basking in record-high margins. Commodity sectors (CO1:COM), (NG1:COM), (XB1:COM), (GH1:COM) could also experience this downward trend.

However, construction materials (XHB), (ITB), and capital goods (SP500-2010), all reveling in elevated margins, might sustain their margins relatively well, the report suggested.

“Staples (XLP) margins could stabilize after three lean years,” it added optimistically.

“Telecoms (XTL) are also likely reaching their nadir,” the report predicted in an upbeat tone.

Conversely, chemical margins are feeble and seem poised to remain that way.

Cyclical sectors’ profit margins are likewise elevated compared to historical standards, particularly in financials (XLF) and consumer discretionary (XLY). Defensive sector margins, in contrast, “are not far from historical norms.”

Covid-related distortions may have disproportionately favored cyclicals over defensives, analysts suggested, hinting at an imminent rebalancing act.