2023? Implications for Profits and Equity Markets
🎧💡 #13 Macro & Business Insights
Hi all, and welcome back to The Macro & Business Insights!
What you’ll find in this episode:
What kind of recession we can expect for the entire year
How profit could impact the businesses and the economies
How stage 1 and stage 2 of bear market could help us in the long run
And How S&P has already behaved in the past with the same situation
We’re going to the end of the year and each of us is starting to ask what happen in 2023.
The GDP forecasts is not encouraging, and we see as 2023F for advanced economies such as US, Eurozone and UK with minus signals for the entire year.
-0.1 from 1.8 for the US / -0.8 from 3.2 for the Eurozone and -1.0 from 4.2 for the UK.
What does this mean for the businesses and for the economies?
Easy, decline in profits. For this reason, in this research let’s see how profits could slow over the year and which impact could we expect on the stock market with historical data.
A 21% decline in profits would cause 2023 earnings to miss consensus expectations by 32%.
However, since this miss to profits would likely be realized over the next 18 months, “forward” earnings would likely only fall 15%-20%.
A soft landing would see profits fall 8% by the end of 2023, a miss of 20% vs consensus.
But again, depending on how slowly these misses are realized, the actual drop in forward earnings may only be 5%-10%.
Let’s see even thanks to Morgan Stanley paper how stage 1 and stage 2 of bear market could try to help us correctly analyze the market’s status now.
For concluding I’d say that the 2023 is not figuring at the best scenario ever, but as we know with the past the markets are always unpredictable and I’m sure they continue to be, so keep high your attention on it.
Macro Insight
In the past three months, as inflation has reached 40-year highs, another worry has begun to seriously buffet financial markets: the increasing probability of a U.S. recession.
The Global Multi-Asset (GMA) of Morgan Stanley team recently increased its estimated probability of a recession to 55%.
The U.S. equity market’s 24% decline from the peak on January 3 to the trough on June 16 was entirely the result of a 29% multiple compression as forward earnings actually rose 8% so far this year.
Multiples entered the year at 21.6x forward earnings per share (EPS) and troughed in mid-June at 15.4x. Morgan Stanley view this multiple compression as Stage 1 of the bear market, one driven by the change in the price of money (i.e., Fed funds rate).
In Stage 2 of the bear market, earnings will fall in absolute terms and more importantly, compared to expectations, which will trigger a second decline in equity multiples, driven this time not by the price of money but by a higher equity risk premium: historically, as earnings fall, multiples fall as well, as investors worry about the depth of the eventual decline in profits.
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Disclosure
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.