US blue-chips set for first profit drop since Covid crisis

America’s biggest companies are set to report the first year-on-year profit drop since the early days of the Covid-19 crisis, with groups missing already subdued expectations taking a particularly strong knock.

Companies listed in Wall Street’s blue-chip S&P 500 index are expected to post a 5.3 per cent year on year fall in earnings for the final three months of 2022, according to FactSet figures that take into account the 252 groups that have reported so far and analyst estimates for the other half. That would mark the first fall in profits since the third quarter of 2020, when corporate America was pummeled by the pandemic.

“At the midpoint of the earnings season, the performance of S&P 500 companies continues to be subpar,” said John Butters, FactSet’s senior earnings analyst.

The fall in earnings comes as the Federal Reserve attempts to cool the economy by lifting borrowing costs, something that has made the business environment tougher and weighed on consumers. High raw material prices and persistent supply chain woes have also posed problems for many groups.

In aggregate, companies are reporting earnings that are 0.6 per cent above estimates, far below the five-year average of 8.6 per cent. If that remains unchanged in the rest of the earnings season, it will mark the lowest level of profit outperformance reported by the index since 2008, Butters said.

Investors are punishing companies that fall short. “Stocks that are missing earnings per share estimates are being penalised severely,” analysts at JPMorgan said.

Consumer discretionary stocks, consumer services, materials and IT are the worst performing sectors thus far. By contrast energy companies and industrial stocks in particular have posted bumper numbers for the final quarter of last year, delivering annual earnings per share growth of 58 per cent and 37 per cent respectively.

Some of the country’s biggest banks have suffered. Citigroup’s profits fell more than a fifth, Wells Fargo’s halved and Goldman Sachs’ plunged by two-thirds. Shares in big tech groups Apple, Amazon and Alphabet all initially slipped after their numbers were published this week. Each warned of decelerating revenue growth and promised to reduce costs.

Other tech companies have fared better. Tesla reported record revenues of $24.3bn for the quarter, up 37 per cent from last year. Analysts had expected $24.2bn.

Many investors say the gloomy earnings were already priced into markets. The S&P 500 lost a fifth of its value last year but it has recovered since the start of this year as investors bet the US Federal Reserve is nearing the end of its rate-rise cycle.