Corporate earnings have been strong, only recently showing signs of weakness. In fact, much of the decline in stock prices so far this year was the result of P/E (valuation) contraction, as earnings have held up. This presents one of the greatest sources of risk through the remainder of 2022 and into 2023.
We expect the outlook for many companies’ earnings to come under pressure as the year progresses owing to slowing revenue growth, increasing cost pressures, and lofty embedded expectations.
Charts 1, 2, and 3 below illustrate the evolution of earnings growth estimates from 2016 through the 2023 forecast season in the US, Europe, and Japan. These snail charts graphically depict the COVID-19 collapse, the recovery to levels far above pre-COVID levels, and current analysts’ forecasts for this year and next.
We view this as dangerous trend extrapolation given 1) how much demand has already been pulled forward due to COVID-inspired consumption changes and global fiscal and monetary stimulus, 2) high margin levels, and 3) the impact of inflationary pressures on both costs and end demand in many industries.
We expect the outlook for many companies’ earnings to come under pressure as the year progresses owing to slowing revenue growth, increasing cost pressures, and lofty embedded expectations. In this type of environment, mindful that Goldilocks tailwinds have shifted direction, we maintain a high regard for downside risk, or “margin of safety” as we refer to it internally. Most of our investments have theses that do not require a robust economic environment as a condition for success; instead, these companies have specific idiosyncratic drivers that will enable them to unlock value.
The information contained herein is current as of the date of this article and should not be relied upon as investment advice. This material has been prepared by Altrinsic on the basis of publicly available information, internally developed data, and other third-party sources believed to be reliable. The market outlook and opportunities noted throughout this material are based upon the opinions of Altrinsic as of the date of this article and there is no guarantee that any investment in the perceived opportunities will be profitable. Investing entails risk, including possible loss of principal.
