Charts 1 and 2 show the historical as well as the 2023-2024 analysts’ forecasts for sales and profits for companies that make up the S&P 500 and MSCI World Index. While analysts have been paring back their forecasts, very slowly, both sales and profits are still expected to expand in the coming two years. Critically, profit margins are expected to widen to record high levels — amid a global economic slowdown, if not outright recession, no less. For example, net margins for S&P 500 companies are currently estimated at 12.8% and 13.5% in 2023 and 2024 respectively, up from the projected 12.1% in 2022 and 11.1% in 2019 (pre-pandemic). We find that hard to believe. Perhaps, in addition to vested interests, many are also guilty of recency bias (where one gives greater importance to the most recent events).
Most economists and analysts have come around to embracing the rising odds for recession this year. Yet, for all the talk, that eventuality does not appear to be reflected in current corporate earnings forecasts. Indeed, the majority of professional advisers, fund managers and analysts are still talking up — to get your money. According to service provider FactSet, 55% of the S&P 500 stock recommendations currently are “buys” and 39% are “holds” with only 6% “sells”. This is unsurprising, since they all have a vested interest in talking up earnings and expectations, and stock prices.
Many are still holding out hope that the economic slowdown-contraction will be brief and shallow, and that central banks will be the first to blink and pause the current monetary tightening cycle. Case in point, futures trading indicates that the interest rate will peak below the US Federal Reserve’s median projection of 5.1% — in fact, betting that interest rates will start to drop sometime in 2H2023. This is contrary to what the Fed itself has been signalling — that there will not be any interest rate cut this year and any perception that its commitment to the 2% inflation target is flagging, is misplaced.
