Wall Street braces for weak earnings season

Stocks may have eked out gains so far in the new year, but it may not last. With corporate earnings season kicking off this week, Wall Street is pricing in a rough quarter ahead — including for itself, with Goldman Sachs and other banks preparing for layoffs.

“Downgrades will be a key driver of the first quarter and especially this earnings season,” Joachim Klement, a market analyst at Liberum Capital in London, told the Dealbook newsletter

A slowing economy, stubbornly high inf lation and the Federal Reserve’s continued policy of raising interest rates will probably mean that profits at S& P 500 companies, as a whole, will fall by 10% this year, Liberum predicts. “I expect a lot of downward guidance for 2023 from all kinds of companies as we head towards recession,” Klement added.

Wall Street analysts have already begun trimming their earnings forecasts. According to Factset, analysts last quarter cut their full-year 2023 earningsper- share forecasts by 4.4%, to $230.51.

That represents the biggest downgrade since 2014.

Energy and financial companies may be among the hardest hit, according to Klement, with the finance sector likely to see earnings per share fall 12% yearon-year.

On Friday, investors will be closely watching for this when a parade of banking giants, including Jpmorgan Chase, Wells Fargo and Bank of America, report fourth- quarter results.

The banks will provide insight into the health of companies and consumers — and the labor market, too. Slowdowns in dealmaking, public offerings, and corporate and mortgage lending are eating into banks’ bottom lines.

Bonuses are on the block, too. Payouts at Wall Street’s largest banks are expected to drop as much as half from last year.

There are glimmers of hope after this quarter. If the Fed begins to ease up on interest-rate increases, leading to falling bond yields, stocks could rebound in the second half of the year. Equity prices are historically 10 times more sensitive to bond yields than they are to earnings, Klement said.

If that holds true, he said, “there’s a possibility we see quite a rally — if not the end of the bear market in 2023.”