Dive Brief:

• Profits at Standard & Poor’s 500 companies fell 4.1% during the fourth quarter, marking the first year-over-year decline in earnings since the height of the coronavirus pandemic during Q3 2020, FactSet said, citing analysts’ estimates.
• Looking ahead, analysts last quarter cut earnings-per-share estimates for calendar year 2023 by 4.4%, FactSet said. The reduction is more than three times the average estimated Q4 decline of 1.3% during the past decade, FactSet said.
• The “lofty” consensus earnings-per-share projection at S&P 500 companies of about $230 for 2023 “fails to account for the challenges companies are likely to face, especially as they start to feel the effect of tighter monetary conditions in earnest,” according to Lisa Shalett, chief investment officer for wealth management at Morgan Stanley.

Dive Insight:

The aggressive pullback in stimulus by the Federal Reserve will probably undercut sales volumes and pricing power at S&P 500 companies this year, “potentially at the same time,” Shalett said in a statement.

Beginning in March 2022, Fed officials pushed up the federal funds rate 4.25 percentage points during seven consecutive meetings in the most aggressive monetary policy tightening since the early 1980s.They have pledged to bring inflation back down to their 2% target, signaling an intention to increase the benchmark rate at scheduled meetings in February and March.

The central bank’s preferred gauge of inflation — the core personal consumption expenditures (PCE) price index excluding volatile food and energy prices — rose 4.7% during the 12 months through November.

Along with inflation and reduced accommodation, recession risk clouds the 2023 outlook for U.S. companies and complicates CFO planning.

The probability of a downturn during the next 12 months is 65%, Goldman Sachs said Thursday, citing consensus estimates while adding that its own researchers see a 35% likelihood of recession.

Fitch Ratings revised down by 2 percentage points revenue forecasts for U.S. non-financial companies because of “expectations for slowing economic growth, with mild recessions in the U.S. and eurozone.”

Following the lead of the eurozone and U.K., the U.S. will probably enter a recession in mid-2023 “as high inflation prompts more interest rate hikes, consumer spending slows and unemployment rises,” Fitch said in a report Sunday.

“Most commodity prices are assumed to remain above sustainable through-the-cycle levels in 2023 and default rates to rise as credit markets tighten,” Fitch said.

At the same time, “downward revisions to revenue have been greatest in the energy and natural resource sector, given our assumption that commodity prices will ease from cyclical highs,” Fitch said. “Less affected sectors include airlines, aerospace and defense, which continue to recover from pandemic lows, and counter-cyclical sectors like food, beverage and tobacco, and healthcare.”

Large U.S. financial institutions — such as Bank of America, JP Morgan Chase and BlackRock — will kick off earnings season on Friday, along with companies in other industries including Delta Air Lines and UnitedHealth Group.