The MTC Investment Team presents the 2023 Market outlook:

  1. The Great Reset – Jason Ritzenthaler, CFA, CTFA
  2. Fixed Income Update – Kate Braddock, CFA
  3. Equity Market Outlook – Jonnathan De Jesus CFA, CIPM
  4. Economic Outlook – Chris Morgan, CFA, CFP®, CAP
  5. Earnings Update – Katie Cihal, CFA, CPA
  6. Geo-Political Update – Sharon Giuffre, CFA, CAP

Earnings Update – Katie Cihal, CFA, CPA

The oxymoron “educated guess” is often used in scientific fiction movies or in quiz shows. People take an educated guess when they are not sure of an answer or how to solve a puzzle but guess it by adding all the information that they have to make a conclusion. In the investment profession, analysts use historical information, company guidance and outlook, central bank decisions, global economic outlooks and other factors when coming up with educated guesses, or “estimates,” to help guide the investment process. These estimates can aid our decision making in terms of what types of securities to buy, sell or hold in investment portfolios. While estimates are just that, we think they are a valuable tool to consider to best serve our clients’ investment needs. One such estimate that we look at is corporate earnings per share (“earnings”) growth.

With one reporting quarter remaining, current 2022 S&P 500 earnings growth is expected to be 5.5%1. Consensus analyst estimates for 2023 project S&P 500 earnings to rise 4.1%1 which would represent modestly slower growth year-over-year. The reason earnings growth is expected to slow is due to high inflation and elevated interest rates taking an even bigger toll on companies who are bracing for the likelihood of more moderate global economic growth. This forecast would represent the slowest full-year profit growth since 2020 and the start of the coronavirus pandemic2.

Although we have started to see inflation decline on the margin in recent months, it remains quite high with the Consumer Price Index at 7.1% in November 2022. This does not only affect the consumer, as the cost of goods is much higher today than it was a few years ago, but it also affects companies’ earnings as it costs more and more to offer products and services to the consumer, thereby eating into the bottom-line.

This environment has helped some companies’ earnings while hurting others, based on their specific sector or industry. Companies that have weathered this environment are ones that are more agile and those that can pass on higher costs to their customers. Companies in sectors like Energy are more poised to be able to do this than companies in other sectors like Consumer Discretionary and Technology. In addition, the dollar’s surge against other currencies in 2022 negatively impacted earnings of many U.S. companies, making it more expensive for US multinationals to convert their foreign earnings back into the dollar.

Current analyst expectations are for S&P 500 earnings to reach $231 in 20232, while our median estimate is $229. Therefore, we do expect 2023 earnings to come in near consensus estimates. It is important to note that consensus estimates have come down from over $2502, so analysts have become more cautious towards the end of 2022. From this data, we can extrapolate if the estimate of $231 holds to be true, despite potential downturn in early 2023, earnings should turn positive in the later part of 2023, leading to a positive returns for the full year.

We do expect an overall positive return on the S&P 500 in 2023, which will echo historical data as we continue to see lowering inflation and the effects of the coronavirus pandemic in our rearview mirror.

As always, we appreciate your confidence in us to help you manage your long-term financial goals and are always here to help!

External Sources: Refinitiv1, Factset2

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