It’s “harmful to underestimate US customers”, says Financial institution of America. Certainly!

US retail gross sales handily beat forecasts Wednesday, after the financial institution’s strategists highlighted “card information [that] exhibits a shocking surge in Jan[uary]” in a chunk revealed earlier than Wednesday’s blowout retail-sales report.

BofA says that it’s harmful to underestimate US firms as nicely. However the outlook for large-cap earnings is . . . unclear, to say the least.

The strategists argue that the decline in company earnings (and profitability) hasn’t been as unhealthy as feared. Earnings season is in its last weeks, and the S&P 500’s 4Q earnings per share has posted a roughly 1-per-cent year-over-year decline, in response to the financial institution. FactSet’s measure of 4Q internet earnings exhibits a decline of round 5 per cent from 4Q of 2021.

BofA additionally factors out that “regardless of the entire vaunted dangers” to profitability — rising wages and rates of interest, paired with falling demand and pricing energy — the online margins on non-financial firms within the S&P 500 are monitoring simply 20 foundation factors decrease than forecast.

Now, the strategists didn’t publish what precisely 4Q margins are, or their forecasts. So we tried FactSet, which seems to solely have annual margins, not quarterly. (If the info supplier tracks quarterly margins, we don’t have permissions for that.) For the complete yr of 2022, FactSet stories that the S&P 500’s Ebit margin is on monitor for a comparatively small decline, to 16.3 per cent from 16.9 per cent the prior yr.

After all, that’s on the again of annual will increase in gross sales and EPS, so it appears cheap to assume that the S&P 500’s margins contracted a superb bit greater than that within the fourth quarter.

However perhaps issues are wanting up for 2023?

Effectively, not likely. This yr alone, firms’ downbeat steering has prompted sellside analysts to chop their 2023 earnings-growth forecasts by three proportion factors, in response to BofA. A part of that is most likely the results of firms’ well-known apply of underpromising and overdelivering. However analysts’ estimates now name for simply 1-per-cent progress for the entire yr, the financial institution says, down from 10-per-cent progress in June. “A lot of the reduce is attributable to weaker margins,” the strategists add.

Extra from the financial institution:

The earnings downturn to this point has been pushed by margin compression and decelerating however nonetheless optimistic gross sales progress (4Q earnings -6% YoY on present constituents, 4Q gross sales +7% YoY). That is typical of the early levels of an earnings recession: gross sales gradual quicker than prices, ensuing within the preliminary earnings decline. The subsequent leg is most frequently pushed by gross sales decelerating additional which we expect is probably going in a comfortable or onerous touchdown. Right here, firms sometimes can’t reduce prices quick sufficient, leading to a extra dramatic deterioration in earnings. The common earnings decline amid optimistic gross sales progress has been -8% YoY vs. -12% YoY when gross sales didn’t simply gradual however truly dropped.

Lengthy-term developments in margins and working leverage don’t look significantly better (please excuse the difficult-to-read textual content within the legend):

Possibly large-cap firms can pull different levers to assist their share costs. Inventory buybacks are all the time an possibility, proper? There was a near-record quantity of company share repurchases this yr, as BofA factors out:

Corporates are shopping for again shares at a wholesome clip in 2023: primarily based on BofA Fairness Consumer Movement Developments, buybacks as a proportion of S&P 500 market cap are monitoring just under 2019 and 2022’s document stats (0.034% vs. 0.036%).

However there’s a catch:

However the excessive greenback quantity (~$130B) is nearly solely (90%) made up of two firms, Chevron and Meta. New buyback bulletins are low — half of what we sometimes see YTD primarily based on information over the past decade, and better charges pose a secular headwind to buybacks; we see a extra compelling case for dividends and capex, each of which have meaningfully lagged buyback spend over the previous decade of ultra-low charges). Tech headwinds might gradual one of many largest buyback sectors in recent times.

So, uh, good luck to all!