S&P 500 Earnings Could Go From Bad to Even Worse in 2023, BofA Says

(Bloomberg) — As Wall Street faces what’s set to be an ugly earnings season of deteriorating profits and weakening guidance, Bank of America Corp. strategists say the rest of 2023 could be even worse.

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The firm expects “big cuts” to plague full-year earnings estimates as companies report first quarter results, with weaker forecasts likely this season against a worsening economic backdrop.

Consensus estimates for S&P 500 earnings per share have been slashed 6% for the first quarter, but estimate cuts historically accelerate any time the economy has entered a recession, BofA strategists led by Savita Subramanian warned in a note to clients Thursday.

Recessionary worries have been amplified in recent weeks following the collapse of several banks and weaker economic data. Minutes from the Federal Reserve’s latest meeting released Wednesday showed staff predicting a mild recession later this year.

The downward trajectory for earnings expectations has already begun. Since June, consensus EPS estimates for 2023 have plunged 13% to $220, but BofA’s forecast for the full year sees earnings even lower at $200.

“We forecast an in-line quarter, but the focus will be on guidance and tighter credit conditions impacting capital expenditures and buybacks,” Subramanian said in the note. “Consensus tends to cut estimates one quarter at a time.”

After the early 2000s recession, quarterly EPS estimates were cut five consecutive quarters in a row by an average 12% ahead of each earnings season. Estimates were slashed six straight quarters by an average of 20% following the global financial crisis more than a decade ago. Meanwhile, estimates for the second half of this year have seen “just a paper cut,” according to Subramanian, which suggests current expectations may still be too optimistic.

Consumer staples is among sectors the bank is sounding the alarm on. Airlines, hotels, and restaurants are expected to reflect the pressures of weaker consumer spending, tough year-over-year comparisons, and wage pressures that remain persistent.

Meanwhile, the technology sector could face what BofA deemed a “Y2K-like aftermath.” Financial services companies, which are now under pressure to shore up capital, represent an estimated 20% of information technology spend. The demand pull-forward during the pandemic was “as extreme as Y2K,” and today analysts expect “a shallower decline in sales” from now through 2024, the note said.

Tech has been at the fore of the stock market’s advance this year, rallying 20% as investors sought refuge in mega-cap companies with strong balance sheets. But the rally could face a reckoning as analysts call for the steepest drop in quarterly profits for the sector since at least 2006.

Some early reporters have unveiled first quarter results, but the earnings season officially kicks off Friday before the market opens with banking heavyweights, including JPMorgan Chase & Co. and Citigroup Inc., slated to report.