Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Q3 earnings amid Apple warning
Peter Garnry
Chief Investment Strategist
Summary: We see 20% probability of earnings hitting current estimates, 10% exceeding estimates (with potential error coming from health care, energy surprise, and consumer staples sectors), and 70% for a significant miss to the downside followed up by gloomy outlook on margins. It seems to us that analysts are way behind factoring in developments that we are seeing financial markets.
Let’s start with Apple and then move on to S&P 500.
Apple
- That Apple is downgrading was partly priced in due to that report recently that their first three-day sales of iPhone 14 was trailing previous product introductions which we also wrote about in our QuickTake and said on our podcast earlier this week. The signals from Micron Technology, reporting today, have long indicated that a rapidly deteriorating environment for memory chips which are used in smartphones and other electronic devices.
- Apple FY22 Q4 (ending 30 September) earnings estimates are down 20% from the peak in March and that is before adjustments from Apple’s own warning.
- Apple EPS is expected at $1.26 up 1.4% y/y, but factoring in Apple’s warning it could be a decline of 5-10%. Revenue is expected at $88.5bn up 6.1% y/y compared to 1.9% y/y revenue growth in the previous quarter. It is quite likely that revenue could slip into negative growth for the quarter.
- Apple is the largest consumer company in the world with a vast supply chain and it is clear that the company is not immune to the cost-of-living crisis from the energy shock hurting consumers. It will have a big impact on the indices but also sentiment. Apple and Tesla are the two stocks that have held up well despite all the headwinds, and if these two stocks are finally coming down then the market may flip into severe negative.
- The company is valued at 5% free cash flow yield and forward P/E of 24x. Given where the US 10-year yield is headed and the cost-of-living crisis this company should probably be valued closer to 20x forward earnings, and thus there is a 15% downside potential, but if earnings are suddenly in decline then it could be closer to 20-25%.
S&P 500 earnings
- Earnings estimates for Q3 are already down 7% from 1 July and that’s before Apple is factored in.
- Analysts are way off in their estimates for Q3. They expect a small decline in revenue despite high inflation! If you take the estimates for revenue and earnings then consensus is expecting the profit margin to expand to 13% - the highest recorded level in many decades. EPS estimate is $55.52 up from $54.54 in Q2. A more conservative view is more like revenue is up another 2.5% q/q and profit margin is down from 12.7% to 11.7% due to margin pressure in all sectors and even in energy and mining due to lower prices on energy and metals in Q3. If you square those two numbers then an average estimate is $51.70 or 7% lower than current consensus.
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