Wall Street Expects Big Drop in Corporate Earnings and More Layoffs Starting January: Analysts

Traders work on the floor of the New York Stock Exchange during morning trading in New York on Nov. 2, 2022. (Michael M. Santiago/Getty Images)

U.S. businesses are expected to see corporate earnings drop owing to a slowdown in the economy and rising interest rates, while many prominent tech firms will continue with staff layoffs starting this month, according to analysts.

“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 New York Times. “I expect a lot of downward guidance for 2023 from all kinds of companies as we head towards recession.”

Elevated inflation, a slowing economy, and the Federal Reserve’s decision to keep raising interest rates will likely result in S&P 500 companies seeing profits decline by 10 percent this year, according to calculations by Liberum.

Fitch Ratings recently revised down their non-financial corporate revenue forecasts owing to expectations of slowing economic growth, with the United States and the eurozone projected to see mild recessions.

Global corporations will have to face macroeconomic challenges this year, with weakening pricing power and demand erosion affecting profitability, it stated.

“Aggregate 2023 revenue growth forecasts for Fitch-rated corporate issuers have been revised down 7 percentage points (pps) in EMEA, 5pps in Latin America, 3pps in APAC, and 2pps in North America over the past year, due to our expectation of weak economic condition,” Fitch said in a Jan. 8 post.

Sectors Seeing Highest Revenue Hits, Layoffs

Companies engaged in finance and energy are most likely to be affected by the revenue drop, with earnings per share of financial firms falling by 12 percent year-on-year, according to Klement.

Big institutions like Bank of America, JP Morgan Chase, and Wells Fargo are scheduled to reveal their fourth-quarter results on Friday.

“Downward revisions to revenue have been greatest in the Energy and Natural Resources sector, given our assumption that commodity prices will ease from cyclical highs,” Fitch said.

“Less affected sectors include Airlines and Aerospace & Defense, which continue to recover from pandemic lows, and countercyclical sectors like Food, Beverage & Tobacco and Healthcare.”

Meanwhile, analysts also expect more announcements of layoffs. According to a recent report by Chicago-based outplacement firm Challenger, Gray & Christmas, U.S. employers announced 13 percent more job cuts in 2022 compared to 2021.

In a December survey of 1,000 business leaders by ResumeBuilder.com, 61 percent of respondents said their organizations will likely see layoffs this year. In addition, 57 percent of those who think layoffs are likely foresee 30 percent or more of their workforce being affected.

This month, Amazon announced that they intend to cut 18,000 jobs worldwide. Salesforce plans to lay off 7,000 jobs that make up roughly 10 percent of their workforce. Video hosting platform Vimeo intends to terminate 11 percent of their employees this month, which comes after a 6 percent layoff in July last year.

EPS Guidance

Analysts at Wall Street have lowered their earnings per share (EPS) estimates for S&P 500 companies more than average for Q4 according to a Jan. 6 report (pdf) by business data and analytics firm FactSet.

“For Q4 2022, the estimated earnings decline for the S&P 500 is -4.1 percent. If -4.1 percent is the actual decline for the quarter, it will mark the first time the index has reported a year-over-year earnings decline since Q3 2020 (-5.7 percent),” the report said.

“For Q4 2022, 65 S&P 500 companies have issued negative EPS guidance and 35 S&P 500 companies have issued positive EPS guidance.”

The sectors which saw the biggest decline in Q4 EPS estimates include materials at 18.8 percent, consumer discretionary at 13.5 percent, and communication services at 11.8 percent.

Nine out of 11 sectors saw a decline in the fourth quarter EPS estimates. The only two sectors where EPS estimates were revised up were energy at 2 percent and utilities at 2 percent.