Prepare for a revenue slowdown
Profit increases have been plentiful for many years as the economy grows, and particularly following the rebound from the COVID-19 crisis in 2020. Analyst estimates for this year show a jump of 27 , 6% of earnings per share (EPS) of the S&P 500, according to FactSet research.
But, for next year, expect a demotion, say the vaunted tipsters Research Ned Davis solidify. According to a study by chief US strategist Ed Clissold and senior quantitative analyst Thanh Nguyen, cyclical factors – we are at the end of the business cycle – as well as squeezed profit margins and possible federal tax increases are expected to hold back EPS growth in 2022. They point to the latest analyst consensus: 9.8% next year, against 16% previously.
For them, a drop in PSE is “a big risk of attracting little attention”. The 2020 recession was short and brutal and was an unnatural intrusion into the economic expansion that has been going on for years, many say on Wall Street. So maybe the slowdown in EPS won’t be that bad, say these diviners.
But for Clissold and Nguyen, a key factor is that next year is late in the game for spectacular profits. Especially since future gains will not be measured against the sudden collapse of 2020. “Ultimately, slowdowns in earnings growth are common at this point in the cycle,” they wrote.
Without a doubt, the last decade has been good for profits, which are a major factor in driving stock prices. The best performance during this period was in 2018, with EPS jumping 20.5%. The bad years were 2020 with its withdrawal of 32.5% and 2015 with a slightly lower decline (negative 15.4%); in 2012, half a point dissolved in 2012 against the backdrop of the European debt crisis. Most of the time, BPA increased at a good rate.
The Ned Davis duo didn’t expect the incredible pace of winning beats to continue, they wrote. In the second quarter of this year, the number of actual EPS results exceeding analysts’ expectations rose 90% from the previous period, the company statistics show. “Even though analysts are realistic about 2022, beat rates are unlikely to continue to hit record highs after record highs, [as] they have this year, ”said Clissold and Nguyen.
The current momentum of sales growth, which is fueling profits, is unlikely to continue, they said. Reason: slowing economic growth, due to supply bottlenecks and consumer spending pinched by lingering fears of viruses, as the Conference board also disputes.
Profit margins are likely to be tight due to supply shortages, rising commodity prices and shipping constraints, experts at Ned Davis said. Higher wages could also hamper the increase in profits, now reaching 4.3% in the past year, they noted. It is, they say, the most in 15 years.
“At this point in previous expansions, the easy gains in gross margins had already been realized,” they observed. “Can companies continue to increase their gross margins in the face of rising input costs, including wages? “
And then there’s the impact of tax hikes, which admittedly can be stuck in an equally divided Congress. “Our analysis showed that a modest tax increase would reduce after-tax profits by less than 5%,” they wrote. “Although small compared [with] other factors, higher taxes could add to the deceleration in earnings growth that was already about to occur. “
Tags: Conference Board, COVID-19, earnings, economic growth, EPS, FactSet, Ned Davis Research, profit margin, supply constraints, tax increases, wages