How much will corporate profits fall in 2023?

The year 2023 brings a significant change on the stock exchanges. Corporate profits will fall, not necessarily stock prices. In the previous year it was the other way around and with strongly falling quotations, profits continued to grow. This change is the result of interest rate increases. However, concerns about the level of profit reduction may be exaggerated.

Earnings season on Wall Street

Tomorrow begins the season for publishing US companies' results for the fourth quarter. It will probably be a prelude to the decline in profits that we will see later in the results for 2023. In the coming weeks, we will probably see the first drop in profits of American companies since Q3 2020 (caused by the Covid pandemic). However, the decline itself may not be as strong as analysts expect. In corporate earnings, we've already had a couple of quarters that were "not as bad as expected" and this could be another one. The market consensus assumes a decline in profits of companies from the S&P 500 index by 2 percent.

JP Morgan and other American banks start the earnings season. Their profits are driven by higher interest rates and strong demand for loans. The burden is write-offs on non-performing loans and a weak capital market. However, the leaders of the decline in profits will be technology companies, which are feeling the rising cost of capital and the decline in consumer demand. Significant declines in profits will be noted in the fourth quarter, among others Amazon, Intel and Meta. Energy companies, which will record good results again, are the rescue for the market. Decline in company profits S & P500 after excluding energy companies, it is expected to amount to 6 percent.

Moderate optimism recommended

It's worth remembering that profit projections almost always decline over the course of the year. The question is how much they will fall this time. It seems we can be moderately optimistic. Profit forecasts have already been heavily revised. Data GDPNow for the fourth quarter (this indicator monitors the results of GDP in the US on an ongoing basis) indicate an increase of 4 percent. And falling inflation will support consumer spending. So once again it can be "better than we expected".

Meanwhile, significant gains are expected in Europe. Companies with Stoxx 600 index are expected to increase profits by as much as 14 percent. In the Eurozone, interest rates started to rise later and are currently lower than in the US, so we will probably see the same effect of falling profits later.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.