Monthly Outlook 202309: US Corporate Earnings Set to Rebound? Hiring Cost Is the Biggest Risk

Monthly Outlook 202309 Equity Research·Strategy Research·Monthly Outlook [Table_Main] US Corporate Earnings Set to Rebound? Hiring Cost Is the Biggest Risk Report Thesis: ◼ With the release of 2023 Q2 stocks earnings reports, market expectations for subsequent earnings momontum have diverged. The optimistic view is that the market's expectations of lower corporate earnings over the past year have been largely priced in. From the current consensus earnings forecast released by FactSet, starting from 2023 Q3, US stock earnings will bottom out and rebound. Report Abstract: ◼ Earnings expectations rise for US stocks. On an optimistic note, the extent of cost inflation has eased significantly compared to 2021 and the first half of 2022. Companies seemed to have managed to pass on inflation to their consumers by adjusting cost structures and raising commodity prices, leaving room for profit growth. The market expects that after 2023 Q3, the operating leverage of S&P 500 companies will turn positive, providing companies with greater profit margins. History shows that S&P 500 companies EPS tend to recover at a strong pace within 10 quarters after bottoming out. From June 30 to August 31 2023, the market has raised the consensus Q3 EPS estimate for S&P 500 companies by 0.4%. At industry level, EPS estimates for 2023 Q3 increased between June 30 and August 31 for 4 industries, led by Consumer Discretionary, Communication Service, and Information Technology. In our last report, we mentioned that in the second half of 2023 and 2024, the biggest uncertainty is whether the resilience of economic activity we are currently observing will provide impetus for corporate earnings. Under more optimistic earnings expectations, it is possible that a rebound in earnings in the second half of 2023 and the upcoming 2024 could offset the decline in valuations. ◼ High labour and capital costs add pressure on stock prices. We believe that high employment costs remain the biggest challenge faced by US companies. The saturation of the working-age population participation rate and the aging of the population have caused the bargaining power of labour to rise sharply post-pandemic. We recommend keeping an eye on whether hiring costs would fall on the outlook of lower cost inflation, thereby boosting the profitability of companies. While rising employment costs are a key risk, we believe that the resilience of the US consumer sector can continue to be viewed favourably. We recommend overweighting the consumer staples sector that has seen their EPS estimates rise over the past two months but dropped in prices. Meanwhile, real interest rates are rising. The increasing appeal of fixed income assets means that risky assets are becoming less attractive, and the cost of capital for companies has also risen sharply. Powell's current policy stance seems to indicate that the Fed's policy rate and QT will move towards two independent directions, so QT is likely to continue even after the hiking cycle ends. We recommend careful selection among tech stocks and favour AI leading players with earnings support in developed markets. ◼ Risks: Sharp upward movement in US labour cost could hurt corporate earnings. Subsequent earnings could be lower than current estimates; Rising real rates could put pressure on risky assets; Higher costs of capital could hurt business growth; Fed's revision of its 0.5% real interest rate guidance could cause market turmoil. Research Analyst Shirui Ouyang (852) 3892 3120 ouyangshirui@dwzq.com.hk [Table_Report] Related reports 1. Negative Interest Rate Era is Over, and Where is Europe Headed? 2022-08-09 2. Be Prepared for Further Aggressive Fed Rate Hikes 2022-09-16 3. Reduce risk exposure to European markets and beware of liquidity shortage in the US 2022-10-17 4. Reduce risk exposure to European markets and beware of liquidity shortage in the US 2022-11-28 5. Timing the Recession and the Fed's Pivot: Bullish and Bearish Views on the 2023 US Stock Market 2022-12-31 6. Time to Deal With More Disappointments 2023-3-1 7. Several Things We Learned From the Silicon Valley Bank Collapse 2023-4-10 8. Caution for a Repeat of the US Tech Bubble 2023-7-17 We would like to acknowledge the contribution and support provided by Hanruo Feng(冯涵若). [Table_Author] 7 September 2023 2 / 14 东吴证券（香港） 请务必阅读正文之后的免责声明部分 [Table_Yemei] Monthly Outlook Table of Contents 1. Earnings expectations rise for US stocks ......................................................................................... 4 2. High labour and capital costs add pressure on stock prices .......................................................... 7 3. Risks Highlight .........................................................