Randy and I agree that communicating with clients is easily the favorite part of our job. One item I find interesting about our client interactions is how our communication can drastically differ from one family to another. For example, some clients are much more interested in talking about personal matters and only desire an executive summary of their Live Well Plan or investment portfolio. Then on the other side of the spectrum, some clients want to discuss the granular details of their situation, and also understand our outlook on inflation or a change made to an investment strategy. It goes without saying but we enjoy BOTH types of clients and all of our clients that fall in-between. Fortunately (or unfortunately), I would be willing to bet this update will excite the granular detail type more.
Expectations For Margin Collapse
When we take the “noise” out of investing, company stock prices will move higher if/when the company can increase their earnings. While there are many other factors that affect stock prices in the short term, higher earnings are the main catalyst for higher stock prices over the long-term. For nearly a year now, many commentators have been calling for a slow-down in corporate earnings and a squeeze of profit margins which could result in a material stock market “pull-back.”
Here at The Price Group, we have held a different view… we have been consistent in our communication that we believe a recession is coming (2 straight quarters of the economy shrinking) BUT our thought has been that this recession will be mild and that the stock market has already priced in that mild recession.
Over the past few months, earnings growth has certainly drifted lower, but earnings have not collapsed like many have expected. According to Loomis Sayles, Q1 2023 earnings estimates were projected at -6.1% (a decline of approximately 6%), but results are coming in well ahead of expectations with 75% of reports beating by an average of 5.3% with many guiding estimates higher. While it’s still early, operating margins are in fact stabilizing and commentary suggests that trend is set to continue.
Headwinds to Tailwinds
Last year’s headwinds are beginning to flip to this year’s tailwinds in support of better earnings for many companies1:
• High headcounts at many companies have turned to aggressive cost cutting across multiple industries.
• Tight supply chains continue to normalize.
• Inventory levels are down significantly when compared to 6 months ago.
• The US dollar’s surge in 2022 has given way to a nearly 10% decline from the peak which helps both export demand and also overseas revenues.
• An improved China demand outlook and energy pains fading in Europe provide a better global growth backdrop for multinational companies.
A Look Back At History
Margin compression has been a popular discussion point over the past few months. But historically, massive declines in margins don’t tend to happen outside of deep recessions (2002, 2008, and 2020). If a deep recession isn’t imminent, then margins are unlikely to come crashing down1. Once again, we are of the opinion that we will see a MILD recession (NOT a deep recession) later this year.
Bottom Line
The negative narratives sound smart, and recession calls are in vogue, but we get suspicious when everyone is saying the same thing. The evidence continues to mount that the economy remains resilient, margins are stabilizing, and earnings are holding up.
About the Author
Matt Price serves as a Partner and Director for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their three children and "Fisher" the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 11 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes everyone needs a wealth coach!
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1 Source: Natixis Investments. The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
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