Changes at the Margin

Seems reasonable to expect that corporate earnings are likely to fall on account of inflation-induced weaker profitability and a slowdown in revenue growth. The growth-stall is likely to stem in part from the Federal Reserve’s efforts to tame that margin-crushing inflation, as the Fed directly intends to provoke a slowdown in macroeconomic activity, perhaps even a U.S. recession, in order to alleviate upward pressures on prices. Data have supported those expectations, but perhaps not as dramatically as many folks might have thought…or hoped. Several aspects of this gap are worth noting: The pace of change in perspective matches what we continue to see as the pace of change in fundamentals: slowing inflation against a backdrop of a slowing economy and somewhat eased employment pressuresExecutives are keen to guide investors into an evolving reality, the near- and medium-term future characteristics of which are unknown even to themThat policy makers, executives and investors alike are slowly steering into fresh realities provides comfort that intensely adverse reactions of all sorts might be limited 202211 SAM CommentaryDownload Listen to this month's Notes from the CIO podcast: Falling, Not Plunging Driven by commentary provided by corporate executives and likely filtered through each analyst’s individual lens on corporate America, earnings expectations for companies within the S&P 500 Index have dropped rather steadily since the middle of this year. These trends surely reflect ruminations on the potential impacts of more restrictive monetary policy, which might slow top-line growth, set against persistent inflation, which could pressure profit margins, along with the evolution of the war in Ukraine and myriad other considerations. For the current calendar year, estimates are just about where they were at the beginning of 2022, though the rainbow-like route those estimates took include a growing deceleration since July. Even so, the pace of decline in optimism has remained rather steadyish in tempo. As importantly, the annual growth figures for the next few years remain positive, at least for now. Divergence Underneath The story isn’t the same for all sectors, though. The Energy and Materials sectors express two different outlooks for prices: energy prices may remain high, while prices for many other raw materials may continue to fall through next year. And oncoming macroeconomic weakness can be seen in the divergence in expected fortunes of the cyclical Consumer Discretionary group relative to the generally more stable Consumer Staples group. With the exceptions of Energy and Utilities, expectations for which remain higher now than in the summer, earn