‘We are likely to see some downward revisions [to earnings] and our forecast for profits growth for 2023 is $200 for the S&P 500. That would mean about a 10% decline in earnings peak to trough.’ — Savita Subramanian, the head of equity and quantitative strategy at Bank of America
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That’s Savita Subramanian, head of equity and quantitative strategy at Bank of America, in a Thursday interview with the Bloomberg podcast “What Goes Up.”
Subramanian said her team thinks 2023 will be a less “stellar” year for the stock market indexes, with the S&P 500 potentially going as high as 4,600, a 15% rally from the current levels. However, the team also expects the large-cap index to bottom out at 3,000, or about a 25% slump from current levels. The S&P 500 ended 0.4% higher on Friday, at about 3,999.
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“I think that analysts in corporates are probably a little less convicted in terms of margins, cost pressure and pricing power going forward,” she said in the Bloomberg interview. “We think that we are going to see those estimates come down, and it’s likely to happen after companies guide more aggressively lower around 2023 earnings.”
The 2023 earnings per share (EPS) consensus for the S&P 500 is $231.05, remaining well above Bank of America’s forecast of $200, according to FactSet. EPS is net income divided by the number of shares outstanding, and could show how much money a company makes for each share of stock.
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Subramanian expects to see pressures in companies “with more labor intensity, like services companies,” and with companies where cost pressure remain high. “Those are the areas where we think that we’re going to see some downward guides on margins.”
Morgan Stanley’s chief U.S. equity strategist Mike Wilson and his team said recently that current corporate earnings forecasts for 2023 are “materially too high,” citing a “way too low” equity risk premium (ERP) for stocks, given the high earnings risk. ERP refers to excess returns investors could receive for holding stocks over risk-free assets.
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Wilson’s team thinks U.S. stocks could slump another 22% in 2023, while their base case forecast for S&P 500 EPS is $195, and their bear case forecast is $180.
The fourth-quarter earnings season kicked off in earnest on Friday with Wall Street banks turning in stronger-than-expected financial results, even as executives warned of a looming economic downturn. Bank of America said it earned $7.1 billion, or 85 cents a share in the fourth quarter, compared with $7 billion, or 82 cents a share, in the year-ago quarter. Revenue, net of interest expense, increased by 11% to $24.5 billion, boosted by sizable gains in interest income thanks to higher rates and loan growth in the fourth quarter.
