Analysis | The Path to a Soft Landing Runs Through Corporate Earnings


It’s a little more than halfway through third-quarter earnings season in the US and projections of a looming economic apocalypse still aren’t reflected in corporate outlooks, as many stock-market bears expected.

There are a couple of plausible explanations. The first is that C-suite smooth talkers are simply managing expectations so as not to set off a cascade of negative sentiment among investors and analysts that makes a horrible year even worse. In that interpretation, we’re being unwittingly cooked like a pot of boiled frogs, and S&P 500 Index earnings per share projections are still poised to drop another 20% to 30%, as is typical in a US recession. The second interpretation — the more hopeful one — is that we’re witnessing the coveted “soft landing” in real time. 

Diving into the particulars of each argument, it’s conceivable that this difference of opinion might actually be good for the economy.

Interpretation No. 1: You’re Being Manipulated

No, not in the accounting fraud sense. But rather corporate executives are doing a good job of managing investor and analyst expectations ahead of a downturn. Every earnings season, they talk down projections another notch. Through the second quarter earnings season, they guided 2023 earnings expectations  lower by around 2.9%. They have  shaved off an additional  3.1% this season. By the time fourth-quarter earnings season comes around in late January, maybe executives will be guiding estimates down to the tune of 4% to 5%. At that point, we’d be very close to assuming an annual earnings contraction for the S&P 500, but it will no longer seem like a big deal. “What’s the difference between modest growth and a modest contraction?” investors will ask. Indeed, earnings per share are already contracting if you exclude the energy sector.

With more and more economists anticipating little to no growth next year, we probably will continue to see company executives lower their earnings forecasts. Notice in the next chart how companies have ratcheted down expectations just a little more each earnings season:

Earnings revisions are just the latest phase of this game; before, it was interest rates. In December, the members of the Federal Reserve’s rate-setting committee told investors that the target federal funds rate was heading to 1.5% to 1.75% in 2023. Then, every few months, they pushed investors’ concept of where rates would end up around 1 percentage point higher. It seems incredible in retrospect that investors were willing to play along as long as they did, because why would the Fed fight the worst inflation in 40 years with 1.75% interest rates? Of course, if Fed Chair Jerome Powell had told us in December that rates were going to 4.75% (as the Federal Open Market Committee recently did), the market would have lost its collective mind. You might consider this process deceptive, but others would call it effective central banking.

Interpretation No. 2: Coming in for a Softish Landing

But what if this really is as bad as it gets? For all its individual highs and lows, third-quarter earnings season can also be interpreted as a sign of economic buoyancy. Only about 24% of companies are missing analysts’ forecasts, a result that is far from Armageddon, even if they’re exceeding artificially low bars.

The engine of  the economy — the consumer — clearly has the capacity to keep spending for months to come, and it’s unlikely that corporate earnings will crater as long as that’s the case. As the latest data from Bank of America show, savings and checking accounts that ballooned during the pandemic are still well above their 2019 levels.

Companies including Procter & Gamble Co. and Apple Inc. keep raising prices to offset higher costs, and revenue for members of the S&P 500 overall looks buoyant, even if profit margins are starting to contract.

What about Inc., the darling of consumers that’s been one of the biggest disappointments of the season? Its weaker-than-expected holiday season projections sent its stock into a tailspin on Friday, but that’s mainly because investors had come to bake such lofty expectations into the price of the shares. Ultimately, it’s still projecting growth. Asked to explain the less-than-glowing outlook, Chief Financial Officer Brian Olsavsky mostly pointed the finger at the international consumer, as the war in Ukraine forces Europeans to spend more of their money on soaring energy. He was more sanguine about the US:

Primarily in the consumer stores business, it was in international. North America, obviously it was strong, but it started to slow a bit, but it was mostly in international we saw the biggest impact and we think that is tied to a tougher recessionary environment there. Even compared with the US it’s worse in Europe right now, the Ukraine war and the energy price issues have really compounded in that geography.

Central to the optimists’ take is the hope that inflation will soon ebb and the Fed will be able to stop raising rates. That’s not a given, but it feels like there’s some light at the end of the monetary policy tunnel. If the consumer can withstand the lagging effects of higher rates, the economy still has a chance.

Even if you think you’re being manipulated by corporate executives, it may well be in everyone’s best interest to let it keep happening (just don’t get too bullish, either, because the Fed won’t like that). This slow and orderly deflation of expectations is exactly what Fed policymakers would want to see: financial conditions getting tighter and consumers spending with less abandon, and all happening in a predictable manner, without the sort of sentiment collapse that can catalyze a recession.

That doesn’t mean the pessimists won’t be vindicated, but if there’s any chance of a “softish landing,” this is probably how it will play out.

More From Bloomberg Opinion:

• Why Earnings Don’t Scare Stocks This Halloween: John Authers

• Tech’s Terrible Week Told in 10 Charts: Tim Culpan

• Boeing CEO Puts Credibility on Line With Writedown: Thomas Black

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg journalist in Latin America and the U.S., covering finance, markets and M&A. Most recently, he has served as the company’s Miami bureau chief. He is a CFA charterholder.

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