By Bill Peters
The S&P 500 is now expected to report a year-over-year earnings decline in the holiday season, the first since just after the COVID-19 pandemic began
Large corporations’ seemingly ceaseless profit growth during the COVID-19 pandemic appears to be coming to an end this holiday season, as the post-lockdown rebound grates up against rising prices, recession fears and tough year-over-year comparisons.
The S&P 500 index SPX is now expected to report a year-over-year earnings decline in the fourth quarter, after forecasts from the current earnings season sent expectations from a 0.2% gain to a 1% decline last week, according to FactSet. Should that forecast hold, along with expectations for growth in the third quarter, it would break an eight-quarter pandemic-era streak of earnings gains.
The change follows a string of disappointing holiday forecasts in the two busiest weeks of earnings season, which has pushed the S&P 500 near completion for the quarter — 85% of companies in the index have now reported third-quarter results. So far, 73 of them have issued fourth-quarter guidance, and 50 of those — 68% — have missed expectations with their holiday guidance, higher than the five- and 10-year historical averages, FactSet senior earnings analyst John Butters said in a report Friday.
For the third quarter, the expected earnings-growth rate for S&P 500 companies is 2.2%. That would be the lowest earnings-growth rate since the 5.7% drop in the third quarter of 2020, the last time S&P 500 earnings declined year over year for a full quarter.
So far, though, analysts have not taken the holiday warnings to mean there should be fear about 2023.
“Analysts in aggregate not only expect earnings growth to return in Q1 2023 (2.3%), but also project that the index will report year-over-year earnings growth in all four quarters of 2023,” Butters wrote in his note.
Much like the outlook has flipped in this quarter amid executives’ guidance, that could change as fourth-quarter results arrive early next year, along with any annual guidance they are willing to give. Meanwhile, investors are cutting valuations: The S&P 500 index snapped a two-week winning streak last week by falling 3.4%, and is now down 20.9% so far this year.
This week in earnings
As inflation eats into consumer spending, at least one thing hasn’t gotten more expensive, reports MarketWatch’s Steven Gelsi: legal weed, in both the U.S. and Canada. That may not be great for the cannabis companies, however, and many North American marijuana companies will report in the week ahead, including Canopy Growth Corp. CGC CA:WEED, which is attempting to dive fully into the U.S. market despite continued federal illegality of the drug standing in the way.
Amid ongoing losses and stalled federal cannabis reform in the U.S., Canopy Growth reports quarterly results Wednesday, after U.S. leader Curaleaf Holdings Inc. CA:CURA reports Monday. Other pot companies expected to report this week include Cronos Group Inc. CRON CA:CRON on Monday, Charlotte’s Web Holdings Inc. CWBHF CA:CWEB on Wednesday and Aurora Cannabis Inc. ACB CA:ACB on Thursday.
Cannabis companies are largely absent from the large indexes, which have been busy with reports the past two weeks but hit a bit of a lull in the week ahead. After 167 S&P 500 companies were expected to report last week, only 30 are on the calendar for the week ahead, and only one Dow Jones Industrial Average DJIA component will report, Walt Disney Co. DIS.
There could be more news about layoffs coming, though some companies made those moves amid the rush of earnings last week. Fake-meat maker Beyond Meat Inc. BYND reports results on Wednesday, after laying off more employees and cutting its sales outlook amid rising competition. Ride-hailing company Lyft Inc. LYFT reports Monday, after rival Uber Technologies Inc. UBER offered up an optimistic financial outlook for the current quarter; Lyft also detailed layoff plans last week, though executives maintained their guidance.
The calls to put on your calendar
Videogame makers: Rising prices and fears of a downturn could test customers’ appetite for gaming and other leisure activities, and that could add to woes in the videogame industry, which has already seen its pandemic boomtimes come to an end. Holiday guidance and the color that executives provide in their conference calls will be crucial — Electronic Arts Inc.’s EA executives were able to assuage Wall Street last week by combining a reduction in sales and billings expectations with increased earnings guidance, and plenty of videogame makers will follow in the week ahead.
Analysts appear upbeat on Take-Two TTWO, which owns Rockstar Games and Zynga Inc. and will report Monday afternoon, and online gaming platform Roblox Corp. RBLX, which reports Wednesday. Roblox, which is geared toward younger gamers, jumped 20% last month after bookings and daily active users in September suggested a turnaround from struggles earlier in the year.
Wedbush analyst Michael Pachter, in a note last week, said he saw potential for Take-Two’s longer-term growth, although recently leaked footage from “Grand Theft Auto VI” has raised concerns of delays.
“Over the long term, we see the potential for meaningful growth if Take-Two can deliver on its pipeline goals and improve momentum within Zynga’s online game net bookings,” he said. “This growth should be within reach even if the release of Grand Theft Auto VI takes longer than expected.”
But he noted that the company faces currency-translation pressures. He also said mobile in-game spending and advertising could take a hit amid the continuing recession anxiety.
Microsoft MSFT early this year announced plans to acquire Activision-Blizzard ATVI, which will release financial results Monday but not hold a conference call nor offer a financial outlook. Pachter wrote in a note this week that the combined company would control 10% of the videogame software market. Even without a deal, he said new and upcoming games for the rest of this year and next year, along with popular names like “Call of Duty: Modern Warfare II” and “Overwatch 2,” would help results.
The number to watch
Disney streaming subscribers: When Disney reported results in August, it overtook Netflix NFLX in streaming subscribers well ahead of expectations. Investors will expect it to maintain that lead with a strong number of additions in the third quarter — Disney finished its fiscal third quarter with 221 million total streaming subscribers to Disney+, ESPN+, Hulu and its other streaming services, and analysts on average expect Disney to report adding more than 10 million net new subscribers on Tuesday.
Wall Street will put a lot of importance on the number ahead of a planned price increase for the Disney’s ad-free streaming plans, as it launches ad-supported offerings before the end of the year.
AMC sales: AMC Entertainment Holdings Inc. AMC has reported at least $1 billion in sales in two of the past three quarters after missing that mark for nearly two years straight. Analysts expect it to come up just short of that mark for the third quarter amid a disappointing slate of movies at $961 million when reporting on Tuesday.
Rival Cinemark CNK managed to top analysts’ expectations by roughly $35 million, though, and the holiday season could bring another $1 billion quarter. Analysts on average are currently projecting $1.23 billion in fourth-quarter revenue for the theater operator, though some are downbeat on the prospects for the holiday season and well into 2023.
“We now believe it may not be until 2024 before the domestic box office can again surpass $11 billion — as was the case for every year between 2015 and 2019,” B. Riley analyst Eric Wold wrote last week while slashing AMC’s price target.
Other companies popular with retail investors that are expected to report next week include Palantir Technologies Inc. PLTR on Monday, Plug Power Inc. PLUG on Tuesday, Rivian Automotive Inc. RIVN on Wednesday and Nio Inc. NIO on Thursday.