“Good quarter,” “congratulations” and similar plaudits are drying up on quarterly earnings calls for S&P 500 companies, setting up 2023 for the biggest such annual decline since the Great Recession. The drop is even more pronounced when compared with the pandemic era, running 35% below the average pace in the previous three years.
Analysts have gone cold on corporate executives as they climb a wall of worry that includes soaring labour costs, surging prices for raw materials, rising borrowing rates and heightening geopolitical tensions that have shown no signs of abating.
“Fewer companies are doing well,” said Alex Zukin, an analyst covering software companies at Wolfe Research. “There’s a higher volume of companies that are in a difficult environment really for the first time.”
It’s not that the recent quarterly results have been atrocious – in fact, 82% of S&P 500 members that have issued results so far topped analysts earnings expectations by an average of 7.6%, according to data compiled by Bloomberg, about double the average beat last year.
Still, even when the numbers are good, analysts may refrain from complements when the economic backdrop appears to be deteriorating. “There’s some sensitivity around giving someone a pat on the back in a tougher environment,” Michael Turrin, an analyst covering enterprise software stocks at Wells Fargo , said in an interview.
The slump in congratulatory remarks may point to increasingly concerned investors heading into 2024 as the risk of inflation remains sticky, potentially putting more pressure on policymakers. There’s also the looming US presidential elections, uncertainty about the conflict in the Middle East and signs of weakening consumer demand.”Investors are asking if the numbers are too high for next year in some cases,” Turrin said. Strong financial performance in the face of those mounting pressures has seen analysts grow more optimistic about next year. Wall Street has boosted its 2024 earnings projections another 1.4% since the start of the reporting season, bringing total revisions for the year to 8.5%.
BloombergAnd senior executives do care whether or not Wall Street research firms pat them on the back. “One hundred percent, we take notice of it,” said Gina Mastantuono, chief financial officer of ServiceNow Inc. “We are very mindful of feedback,” she said. Santa Clara-based software provider ServiceNow has received over 150 plaudits over the last five years, the most among members of the S&P 500, though the amount of kudos it received this quarter fell to seven from 12 a year ago.
Compliments on earnings calls create a sense of optimism, said Wells Fargo’s Turrin, who leans toward not applauding executives during these sessions and, instead, focuses on getting information and context about the quarterly results.
Phrases such as “great quarter” have become so ubiquitous that they have even inspired X, formerly known as Twitter, account names and podcast titles. Equity analysts also tend to be more upbeat: Out of more than 11,800 current ratings on S&P 500 stocks, only 5.3% are rated sell, while 55% are buy recommendations and 39% are holds.
“An objective perspective is surprisingly refreshing in the analyst community,” Turrin said.