The outlook for corporate profits has swiftly deteriorated, with inflation still fast and a banking scare prompting some investor caution.
As the country’s largest companies prepare to report their results for the start of the year — offering a view into how the economy is faring as a banking shock reverberates — they’re already warning investors to brace themselves.
For the big businesses that make up the S&P 500 index, Wall Street’s forecasters expect that profits in the first three months of 2023 fell almost 7 percent from a year earlier, according to estimates collected by FactSet. That would be the second consecutive quarterly decline, and the biggest since a severe — though brief — slump in the early days of the coronavirus pandemic in 2020.
The forecast marks a swift deterioration in predictions. At the start of the year, the consensus was that profits would be roughly in line with the first quarter of 2022. But since then, continuing worries about inflation followed by a flare-up in the banking sector in March have soured the outlook.
Businesses have also told investors to dial down their expectations, with 78 companies in the S&P 500 offering guidance about their results that is below the average Wall Street estimate. It’s true that corporate executives often manage expectations so they can give investors a pleasant surprise instead of a nasty shock, but such low forecasts are rarely quite so widespread, suggesting there could be more to them this time around, said Ron Temple, chief market strategist at Lazard.
“It’s more likely that we are going to be disappointed than surprised on the upside,” he said.
Everyone wants to hear from the nation’s big banks.
The first group to report results happens to be the industry that investors are most eager to hear from. Major banks including JPMorgan Chase, Citigroup and Wells Fargo will post their results on Friday, the first formal update for the industry since the collapse of Silicon Valley Bank last month.
Investors and analysts note that it’s likely too soon to see the full impact of March’s turmoil, given that it came so close to the end of the quarter. Instead, attention will focus on comments from the bank’s chief executives and chief financial officers about what they’ve seen more recently, and what to expect — both for the banks and for the economy.
“It’s going to be more about the commentary and tone,” Mr. Temple said.
A key question on investors’ minds will be just how many customers transferred their deposits from smaller regional lenders to the biggest lenders, and what financial steps the smaller competitors have been forced to take to stay afloat.
There are already signs that banks have retreated from lending, and that could add pressure to other companies in need of cash as the economy weakens.
