Monthly Outlook 202309: US Corporate Earnings Set to Rebound? Hiring Cost Is the Biggest Risk

MonthlyOutlook202309 EquityResearch·StrategyResearch·MonthlyOutlook USCorporateEarningsSettoRebound?HiringCostIstheBiggestRisk ReportThesis: Withthereleaseof2023Q2stocksearningsreports,marketexpectationsforsubsequentearningsmomontumhavediverged.Theoptimisticviewisthatthemarket'sexpectationsoflowercorporateearningsoverthepastyearhavebeenlargelypricedin.FromthecurrentconsensusearningsforecastreleasedbyFactSet,startingfrom2023Q3,USstockearningswillbottomoutandrebound. ReportAbstract: EarningsexpectationsriseforUSstocks.Onanoptimisticnote,theextentofcostinflationhaseasedsignificantlycomparedto2021andthefirsthalfof2022.Companiesseemedtohavemanagedtopassoninflationtotheirconsumersbyadjustingcoststructuresandraisingcommodityprices,leavingroomforprofitgrowth.Themarketexpectsthatafter2023Q3,theoperatingleverageofS&P500companieswillturnpositive,providingcompanieswithgreaterprofitmargins.HistoryshowsthatS&P500companiesEPStendtorecoveratastrongpacewithin10quartersafterbottomingout.FromJune30toAugust312023,themarkethasraisedtheconsensusQ3EPSestimateforS&P500companiesby0.4%.Atindustrylevel,EPSestimatesfor2023Q3increasedbetweenJune30andAugust31for4industries,ledbyConsumerDiscretionary,CommunicationService,andInformationTechnology.Inourlastreport,wementionedthatinthesecondhalfof2023and2024,thebiggestuncertaintyiswhethertheresilienceofeconomicactivitywearecurrentlyobservingwillprovideimpetusforcorporateearnings.Undermoreoptimisticearningsexpectations,itispossiblethatareboundinearningsinthesecondhalfof2023andtheupcoming2024couldoffsetthedeclineinvaluations. Highlabourandcapitalcostsaddpressureonstockprices.WebelievethathighemploymentcostsremainthebiggestchallengefacedbyUScompanies.Thesaturationoftheworking-agepopulationparticipationrateandtheagingofthepopulationhavecausedthebargainingpoweroflabourtorisesharplypost-pandemic.Werecommendkeepinganeyeonwhetherhiringcostswouldfallontheoutlookoflowercostinflation,therebyboostingtheprofitabilityofcompanies.Whilerisingemploymentcostsareakeyrisk,webelievethattheresilienceoftheUSconsumersectorcancontinuetobeviewedfavourably.WerecommendoverweightingtheconsumerstaplessectorthathasseentheirEPSestimatesriseoverthepasttwomonthsbutdroppedinprices.Meanwhile,realinterestratesarerising.Theincreasingappealoffixedincomeassetsmeansthatriskyassetsarebecominglessattractive,andthecostofcapitalforcompanieshasalsorisensharply.Powell'scurrentpolicystanceseemstoindicatethattheFed'spolicyrateandQTwillmovetowardstwoindependentdirections,soQTislikelytocontinueevenafterthehikingcycleends.WerecommendcarefulselectionamongtechstocksandfavourAIleadingplayerswithearningssupportindevelopedmarkets. Risks:SharpupwardmovementinUSlabourcostcouldhurtcorporateearnings.Subsequentearningscouldbelowerthancurrentestimates;Risingrealratescouldputpressureonriskyassets;Highercostsofcapitalcouldhurtbusinessgrowth;Fed'srevisionofits0.5%realinterestrateguidancecouldcausemarketturmoil. 7September2023 ResearchAnalystShiruiOuyang(852)38923120 ouyangshirui@dwzq.com.hkRelatedreports 1.NegativeInterestRateEraisOver,andWhereisEurope Headed? 2022-08-09 2.BePreparedforFurtherAggressiveFedRateHikes 2022-09-16 3.ReduceriskexposuretoEuropeanmarketsandbewareofliquidityshortageintheUS 2022-10-17 4.ReduceriskexposuretoEuropeanmarketsandbewareofliquidityshortageintheUS 2022-11-28 5.TimingtheRecessionandtheFed'sPivot:BullishandBearishViewsonthe2023USStockMarket 2022-12-31 6.TimetoDealWithMoreDisappointments 2023-3-1 7.SeveralThingsWeLearnedFromtheSiliconValleyBankCollapse 2023-4-10 8.CautionforaRepeatoftheUSTechBubble 2023-7-17 Wewouldliketoacknowledgethecontributionandsupportprovided byHanruoFeng(冯涵若). TableofContents 1.EarningsexpectationsriseforUSstocks4 2.Highlabourandcapitalcostsaddpressureonstockprices7 3.RisksHighlight11 TableofFigures Figure1:USstocknetprofitmarginisprojectedtoreboundfrom2023Q24 Figure2:Usstockprofitscontinuetofallin2023Q2afterabriefreboundin2023Q14 Figure3:UsstockEPSisexpectedtostartrisingin2023Q24 Figure4:PPIhasfallensignificantly5 Figure5:S&P500operatingleverageisexpectedtoshiftfromnegativetopositive5 Figure6:ChangeinS&P500EPSstartingfrom10quartersbeforeeachEPStrough5 Figure7:From2023/6/30to8/31theQ3EPSforecastforS&P500companiesisraisedby0.4%7 Figure8:Theconsumersectorsandinfotechleadtheupwardshiftin2023Q3EPSestimate7 Figure9:Theconsumersectorsandinfotechleadtheupwardshiftin2023CYEPSestimate7 Figure10:Labourforceparticipationrateofworking-agepopulationisatall-timehigh8 Figure11:LabourshareofGDPmaybeabouttorise8 Figure12:Theproportionofcompaniesplanningtoraisepricesinthenext3monthshasdeclined8 Figure13:Hiringcostisstillhigh8 Figure14:5-yearrealrateshaveclimbedtoabout2%9 Figure15:5-yearrealyieldiscorrelatedwith12monthtotalreturnofBloombergAggregateBondIndex(forward13-month)9 Figure16:Non-profitabletechstockshavelaggedbehindinprices10 Figure17:Long-endyieldshaverisensignificantlysince2023Q210 Figure18:Treasuryissuanceplan(asof2023/07)10 Figure19:Fed'sguidanceforlong-termrealinterestratesremainsatabout0.5%n(2.5%-2