The banking problem is likely to hit corporate profits of all kinds. The big risk is that weakened banks will lend less and thus weaken the economy as a whole.
This is bad news for banks, but potentially bad news for other companies as well. According to FactSet, analysts’ overall earnings per share for 2023 for S&P 500 companies have fallen about 11% over the past year. The US Federal Reserve’s existing rate hikes, designed to curb inflation by reducing economic demand, are beginning to dampen corporate sales while higher costs put pressure on profits.
And Now, reduced bank lending could slump profits even further. If the banking crisis were to worsen, the Fed would slow down – or stop – interest rate hikes and ultimately support the economy. But a weakened banking sector would directly damage the economy – and with it sales and earnings.
“Is the recent bank stress the catalyst for consensus gains to finally become more realistic?” wrote Morgan Stanley
‘S
Chief Strategist for US equities, Mike Wilson. “Our belief that earnings estimates are 15-20% too high has only strengthened.”
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A few recent developments make that particularly likely. EPS estimates have edged up somewhat in recent weeks as companies are caught between Q4 and Q1 earnings reports and the banking problem has yet to really spread to the broader economy. If the banking problem poses a real threat to earnings on top of the threat of already higher interest rates, earnings forecasts would drop even lower from here.
For now, 2023 EPS estimates for the S&P 500 of $221 are still slightly above last year’s result of $216. So if all of this translates into a 2023 recession, there could still be a long way down. Recessions typically result in double-digit declines in EPS.
Write to Jacob Sonenshine at [email protected]
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