Investors are bracing for a miserable stretch of earnings reports that will likely extend the dominance of so-called value shares as U.S. corporations grapple with high inflation and rising borrowing costs, the latest MLIV Pulse survey showed.
The broad view on stocks remained deeply pessimistic as earnings heat up this week, with most of the 424 survey respondents expecting the S&P 500 Index's slide to deepen. The survey results signaled no relief for equities already reeling from their biggest annual slump since 2008 amid a toxic mix of hawkish central banks, a strong U.S. dollar and the specter of recession.
More than half of the respondents said they're inclined to invest more in cheaper value stocks -- those trading at a lower price than otherwise indicated by company performance -- compared with only 39% three months ago. The sector's outperformance-versus-growth last year was the greatest since 2000 as rising rates hurt expensive sectors such as technology by increasing the discount for the present value of future profits.
"We do believe that value names will outperform this season as those companies tend to be much more domestically focused and are benefiting from the pandemic recovery," said Jay Hatfield, CEO at Infrastructure Capital Advisors in New York.
U.S. companies' announcements start in earnest Friday with results from major banks including JPMorgan Chase and Citigroup. U.S. equity futures edged higher Monday, signaling the rally that lifted the S&P 500 late last week was set to extend ahead of Thursday's key inflation report.
As ugly as fourth-quarter reporting now appear, subsequent earnings seasons may be worse. Nearly 50% of MLIV Pulse survey respondents said releases for the April-June period will reflect the most damage from a potential economic contraction.
A key question this season is how resilient profit margins will prove in the face of surging costs. Underwhelming early reports -- including from Exxon Mobil, Tesla and Micron Technology -- showed there are reasons to worry, while job cuts portended growing struggles in the technology sector.
Bloomberg Intelligence analysts expect S&P 500 earnings to have fallen 3.1% in the fourth quarter compared with a year earlier. The S&P 500 Pure Growth Index, which tracks firms in that sector, is projected to post an earnings drop of about 16%, while profits at its value counterpart likely rose 1.4%.
"We're coming off all-time-high corporate margins and with the inflationary and recessionary pressures in place, we're likely to see earnings roll over," said Anneka Treon, a managing director at Van Lanschot Kempen in Amsterdam.
Some 31% of MLIV Pulse survey participants expected cooling inflation to be the biggest positive driver for earnings this period, with slightly lower tallies for cost-cutting and supply-chain improvements. Consumer-price pressures have ebbed from a four-decade high, and fresh data released Thursday is expected to show further easing.
Yet investors are reluctant to buy in without a clearer read on the Fed. The market trimmed expectations for how high the central bank will push its overnight benchmark this year after data released Jan. 6 showed slower-than-projected wage growth and weakness in services.
Esty Dwek, chief investment officer at Flowbank SA in Geneva, said she's more optimistic about equities as "we're close to the end of the tightening cycle, and data continues to point to disinflation."
Meanwhile, tech firms -- investor favorites for much of the last decade -- have suffered steep losses. The tech-heavy Nasdaq 100 slumped 33% in 2022 compared with a 9% decline in the Dow Jones Industrial Average, which comprises more value stocks.
Tech job cuts grabbed headlines last season, and no letup is apparent with Amazon recently unveiling the biggest headcount reduction in its history -- some 18,000 employees -- and Salesforce saying it will cut about 8,000 employees. Morgan Stanley strategist Michael Wilson warned such measures may not be enough to bolster profit margins.
With nearly 60% of MLIV Pulse survey participants projecting higher 10-year Treasury yields over the next month, the outlook for growth stocks remains grim.
Goldman Sachs market strategists said last week that although stock valuations fell sharply last year, growth shares remain expensive, while financials and energy are relatively cheaper.
The path of the economy will likely alter that dynamic, with most analysts seeing a U.S. recession this year. BI analysts expect S&P 500 Pure Growth Index earnings to rise 4.1% for 2023 compared with a 2.3% drop in the value gauge. For now, however, a defensive posture is preferable to many money managers, said Danni Hewson, a financial analyst at AJ Bell.
"There are so many variables at play and the earnings potential of value versus growth will be dependent on how quickly rate rises turn to rate cuts and how deep recession takes the global economy underwater," Hewson said. "For many, this set of results will be the moment when the chickens really come home to roost."
Information for this article was contributed by Airielle Lowe, Wendy Soong and Tomoko Yamazaki of Bloomberg News (WPNS).