Weekly Wisdom – January 4, 2022

By Hightower Great Lakes on January 4, 2023

Consensus EPS Falling

Analysts, at the beginning of 2022, were projecting +10% y/y EPS growth in 2023. This continued to be a steady expectation until the second half of 2022. Since July, analysts have been cutting estimates, and 2023 EPS growth is now cut to +5% y/y.

Chart 1: Downward Earnings Revisions Since July¹

This reflects a similar annual pace as 2022 earnings growth, which is projected to be +5.75%. For perspective, the average annual EPS growth in the decade leading up to 2020 was +10.5%. Within that decade, three years recorded EPS growth <1%.

Chart 2: Historical EPS Growth Varies²

Slower earnings growth is also reflecting expectations for slower economic growth. Currently, economists are projecting negative GDP growth in the second half of 2023.

Chart 3: GDP Expectations Negative in Second Half of 2023³

There is a lot of negativity in these expectations. Continuation of restrictive monetary policy is the overarching reason for this rather bearish sentiment.

There’s a narrative about the deteriorating health of the U.S. consumer because of lower savings rates and rising delinquency rates, though we’ve continued to hear from banks that personal balance sheets remain healthy. Further, there was a 10% m/m improvement in November personal savings.

The consumer is supported by $2.3 trillion in excess savings from the pandemic, strong wage growth, job demand and low unemployment, and now lower inflation costs.

The Fed estimated that in mid-2022 households in the top half of income distribution still held $1.35 trillion in excess savings, and households in the bottom half of income distribution still held $350 billion in excess savings. Gas prices are back to pre-Russian invasion levels, rents are finally seeing improvement (following housing prices), and prices broadly for consumer goods are retreating.

The consumers’ appetite for demand is staying elevated, inflation costs are down, and we believe there’s a lot of underappreciated momentum in the economy to support earnings growth.

Inflation Falling

Inflation is falling broadly as well as in a number of key categories, like rents. Inflation remains sticky in the form of wages, which is positive for the consumer. However, Paychex just released data that indicates moderating wage growth into the close of 2022. December hourly wage growth was below 4% for the third time in four months.⁴

The Fed is paying close attention to wage figures amid their efforts to combat inflation. Moderating rents and wage pressure is a very good sign for the Fed, the economy and corporate earnings.

In order to further sustain earnings growth, companies will need to find ways to combat elevated wages – and this will likely take form, in-part, from lower input costs and more favorable FX rates.

Supply chain inflation continues to trend lower, with a collapse in freight/shipping rates amid easing supply challenges and lower fuel surcharges. Commodities, in aggregate, are well below their peak-levels from mid-2022. Labor shortages will continue to be addressed, and technology advancements will also continue to relieve cost pressures in 2023.

Lastly, currency rates were a significant headwind in 2022, and that is expected to subside in 2023 as the Fed slows their pace of rate hikes.

Consumer Resilience

Luxury travel spend is on the rise. Consumer confidence has rebounded from July lows and ended the year at its highest levels since April.

Within the same Paychex report mentioned above, leisure and hospitality rank first among sectors in hourly earnings growth. These sectors continue to re-hire after pandemic layoffs, and this trend helps highlight the strong demand for consumer services.

A few notes of persistent consumer demand can be seen in Las Vegas occupancy rates, which have returned to pre-pandemic levels; home improvement spending at record levels; and a December research report indicating 60% of respondents plan to spend more on travel in 2023⁵

Narrative vs. Action

The action that we’re seeing take place in the economy conflicts with the negativity ruling the narrative. Company guidance will be important in the upcoming earnings season, particularly regarding demand and capex.

We continue to hear from management teams about resilient demand, while labor shortages gradually become resolved and lower input costs will support margins.

A higher cost of capital will more likely slow new entrants/competition and favors high quality brand-names and industry compounders with better capital structure, steady growth and strong management.

Click here to read last week’s Weekly Wisdom (12/15).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

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This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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¹ Source: FactSet (chart). As of January 4, 2023.

² Source: FactSet (chart). As of January 4, 2023.

³ Source: FactSet (chart). As of January 4, 2023.

⁴ Source: PR Newswire. As of January 4, 2023.

⁵ Source: Bloomberg. As of January 4, 2023.