U.S. profit forecasts weaken as companies assess inflation risks

With first-quarter U.S. earnings in the final stretch, corporate
growth expectations for the current quarter and 2022 mostly are
declining as costs surge for oil and other supplies and interest rates
rise.

Sky-high oil has boosted forecasts for energy company earnings while
feeding into concerns about profit margins for many other S&P 500
industries.

Disappointing outlooks from Amazon.com (AMZN.O), Netflix (NFLX.O), and
other major players have stood out among recent reports, even as the
first quarter’s estimated year-over-year profit growth has risen to
10.4% from 6.4% at the start of April, according to IBES data from
Refinitiv. read more

Amazon.com delivered a disappointing quarter and outlook, saying it
was swamped by higher costs to run its warehouses and deliver
packages. read more

As of Friday, analysts had lowered their overall forecast for S&P 500
second-quarter profit growth to 5.6% from 6.8% at the start of April,
while the full-year forecast has held at 8.8%, based on Refinitiv
data.

The 2022 growth estimate, however, drops to about 5% without the
energy sector’s (.SPNY) growth – a sizeable impact for a sector that
accounts for just 4% of the S&P 500’s market capitalization.

“There will be more downside given the oil shock that we saw,” said
Ohsung Kwon, U.S. equity strategist at BofA Securities in New York.

“It’s going to take some time for this to play out,” he said. “It’s
not just from energy; it’s overall inflation, plus the higher rate
environment.”

To be sure, negative corporate outlooks typically outnumber positive
ones in a quarter because companies tend to be cautious when giving
guidance.

But, according to BofA data, the three-month ratio of above-consensus
corporate guidance versus below-consensus guidance fell in April to
its lowest level since June 2020.

Stocks have slumped in recent weeks as investors worried the Federal
Reserve may need to hike interest rates more aggressively to tame
inflation. The S&P 500 (.SPX) is down about 13% for the year so far.

On Wednesday, the U.S. central bank raised rates by half a percentage
point as expected. Recent data showed U.S. monthly consumer prices in
March increased by the most in 16-1/2 years, as Russia’s war against
Ukraine boosted the cost of gasoline to record highs. read more

Forward-looking comments from companies have done little to allay
investor fears.

“If anything, the comments from CEOs are just reflecting the same
macro-economic concerns,” said Shannon Saccocia, chief investment
officer at SVB Private Bank. “They have been very conservative because
they have very little transparency on how well engineered an economic
slowdown will be.”

Since the start of April, the estimated 2022 S&P 500 energy sector
earnings growth has gone up to about 93% from about 65%, per Refinitiv
data. Over that same period, the 2022 S&P 500 consumer discretionary
earnings growth forecast has gone down to about 7% from 17%.

“If inflation peaks, we’ll be OK and we’ll continue to see growth,”
said Peter Cardillo, chief market economist at Spartan Capital
Securities in New York. “If not, then it’s going to be a problem.
Companies are going to have to do cost cuttings even though they might
have earnings that on the surface look good.”

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