Warnings of an earnings apocalypse may turn out to be greatly exaggerated

Published Tue, Jul 19 20229:43 AM EDT

Reports that Apple may slow hiring interrupted the two-day stock market rally yesterday, but why was this a surprise? Only about one-third of Apple's revenues come from the United States. About a quarter comes from Europe, and about 18% from China, according to FactSet. Would anyone be surprised if revenues slowed from Europe and China, particularly after the covid lockdowns in China? Should analysts be cutting Apple's earnings estimates? They already did modestly downgrade the iPhone maker's third quarter (the quarter ending in June) expectations in April, to $1.15 from $1.25, but haven't changed since. And even with the cut, analysts are still expecting a healthy 9% gain in full year earnings over 2021. Fourth quarter (ending in September) expectations have also been steady since April, currently at $1.31. One simple reason there hasn't been any dramatic cuts in the second half numbers is that there is a very bullish narrative beginning to emerge around 2023, for Apple and much of the tech sector in general. "The Street is well aware of weakness this quarter and we believe ultimately is looking past June numbers to the September and December quarters with all eyes on the iPhone 14 production/demand cycle for the Fall staying on track," Wedbush analyst Dan Ives said in an overnight note to clients. "Apple is continuing to focus on a robust product pipeline and services ramp into 2023 including what we believe will be the highly anticipated AR/VR headset release," Ives said. Earnings estimates for the broader S & P 500 have also been remarkably sticky. Despite inflation worries, an aggressive Fed, and the Russian invasion of Ukraine, 2022 earnings for the S & P 500 are expected to be up 10% this year, about where the estimate was three months ago. Warnings of an earnings apocalypse for the wider market have been predicted for two months, but still hasn't happened yet. We are entering the heart of earnings season, and despite cautious comments from some banks and a few industrials (like Fastenal), the market is not dropping to new lows. The cautious earnings commentary, bulls argue, is not going to dramatically change the narrative for three reasons: 1) The macro data has been or will be improving: the data doesn't support a recession, inflation is likely peaking, and most of the Fed rate hikes have been front-loaded, leading many investors to believe the Fed will now be cutting rates in 2023. 2) Much of the gain in S & P 500 earnings are coming from energy stocks, but elsewhere estimates for many sectors (consumer discretionary, banks) have already come down significantly. Cathie Wood darlings like Spotify, Roku, Twilio, Shopify, Spotify, and Zoom all saw earnings estimates cut dramatically in the past three to five months. 3) Prices in many sectors already reflect lower earnings expectations: most speculative tech names are at least 50% off their highs, while most big banks and big Industrials hit new lows two weeks ago. In this bullish scenario, it's all about setting up for 2023, as Dan Ives argues for Apple. Still, it's a long way to the fourth quarter and 2023. Along the way, the consensus view is that there's still a retest of the lows come August and September. Along the way, there are plenty of potential landmines, including the U.S. dollar strength, which is emerging as an additional headwind for multinationals. IBM and Johnson & Johnson both flagged the negative impact of a higher dollar on their earnings calls.