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Earnings: Declining Results Might Be a ‘Win’
The first-quarter earnings season is just underway—and it could provide a rare example of a decline over last year’s numbers actually being a good thing.
By most analysts’ estimates, earnings will fall 6.8% for the first quarter—the second straight quarterly decline and the largest since the outbreak of the COVID-19 pandemic.
But experts say even a drop that steep may bode well for a rebound later this year. If profits come in lower than expected, they say, it could trigger more and deeper layoffs, salary cuts, and other austerity measures.
“Meeting expectations this quarter is a win,” says Justin Ripley, a senior client partner in the Global Industrial practice at Korn Ferry. Ripley says the results could signal that the economy has bottomed out, giving leaders more confidence to make investments in growth and talent. “They can swallow another down quarter if they know we’ve hit bottom,” he says.
Meeting or beating expectations won’t be easy. Last quarter, the percentage of S&P 500 companies that exceeded profit estimates was the lowest since the second quarter of 2020, when COVID-19 lockdowns in the US went into effect. Analysts are still projecting overall corporate profits to grow this year, but that could change based on what companies report over the next few weeks.
The difficulty of forecasting results suggests businesses are still operating in a transitional environment, says Christian Hasenoehrl, a Korn Ferry senior client partner and global account leader in its Consumer and Industrial practices. Leaders still don’t know what the effects will be of the banking crisis, interest-rate changes, and slower consumer spending. Yet the labor market remains tight and wages are on the rise. “There are all these dichotomies going on that are not normal,” says Hasenoehrl.
Until there is clarity, leaders are likely to lean more towards austerity than growth, Hasenoehrl says. He notes that this year many large consumer companies are decreasing capital expenditures, or holding them steady, after the across-the-board increases of each of the last two years. “Companies are managing the cost line more tightly,” he says.
While layoffs have gotten most of the attention, companies are taking other actions to reduce costs, like lowering bonuses and wages, cutting back on benefits, closing support centers, and consolidating real estate. Leaders aren’t taking big risks; instead they’re doubling down on strategy and investing in incremental growth, says Deepali Vyas, global head of the FinTech, Payments, and Crypto practice at Korn Ferry.
Vyas says these moves aren’t just about positioning companies for quarterly results or even for the rest of this year. From a valuation perspective, she says, the most important thing stakeholders need to hear from leaders during first-quarter earnings calls isn’t the financial results. “It’s how they are prioritizing needs for new, sustainable, and profitable business models,” says Vyas.
For more information, contact Korn Ferry's Corporate Affairs practice.