Earnings: Not Quite So Bad

The January earnings season sets the tone for the rest of the year. So far, the numbers are only half as bad as expected.

Experts have seen the future and have a new name for it: “a mild recession.”

Despite doom-and-gloom predictions about the earnings season, companies so far are looking at results that are not as bad as anticipated. With major banks and airlines already reporting numbers, and technology and consumer stalwarts on deck, S&P 500 firms are now expected to report an earnings decline of 2.4% for the fourth quarter of 2022. While that would mark the first year-over-year decline since the third quarter of 2020, it is also well below projections, which have steadily fallen from an initial expected decline of 7% in November. 

For business leaders, the January earnings season sets the tone for the rest of the year, and the better-than-expected results suggest that earnings declines are more a function of individual company performance than inflation, interest rates, or the other macroeconomic concerns that weighed on stocks for most of last year, says Jeff Constable, co-leader of the Global Financial Officers practice at Korn Ferry. “There’s a feeling among CFOs that the period of unpredictable swings in some of the macroeconomic variables may be coming to an end,” he says. 

Many experts are backing off their previous predictions of a full-blown recession this year and are now expecting only “a mild recession.” Several factors are responsible for the reversal, among them falling inflation, strong consumer spending, and improving conditions in Europe and China. At the same time, headline-making layoffs in the tech and financial services sectors aren’t expected to spread to other industries—instead, the belief now is that job and wage growth will keep them contained. Chad Astmann, co-head of global investment management at Korn Ferry, says the negative sentiment that began last year, when all of these macro conditions seemed to be conspiring together, “feeds into the analysis of both buy- and sell-side analysts, darkening their interpretations of the numbers.” Once analysts started lowering their growth projections, says Astmann, the situation snowballed, “spurring further downward analysis and sentiment.”

In fact, Constable says, CFOs suffered from the same difficulty in forecasting results as analysts, because of the lack of certainty around macroeconomic conditions. Constable says many of the CFOs he has spoken with “have real confidence in their underlying business fundamentals,” but that the volatility in the macro environment “has really challenged a lot of forecasting models.” As a result, Constable says, there is a wider effort among CFOs to “tighten up their companies’ forecasting processes and accuracy.” 

But just because conditions aren’t as bad as expected doesn’t mean leaders are in the clear. Interest rates could continue to rise, for instance. China could falter in its attempts to reopen. Consumers could halt spending if prices don’t drop in line with inflation. That’s why firms are readying themselves to pivot to austerity measures if the outlook worsens. Layoffs are the most obvious example, but many firms are looking at other ways to cut costs, such as slowing investments or cutting bonuses. 

Still, the better-than-expected results mean that some areas that were expected to see cutbacks—such as climate and diversity efforts—may not. This includes areas that take ESG concerns into account, says Alina Polonskaia, global leader of the DE&I Consulting practice at Korn Ferry. She says tough economic times can serve as a good barometer of whether or not firms are genuine about their ESG pledges. “Now is when the wheat gets separated from the chaff,” she says. 

The challenge for leaders overall is managing expectations for the first half of the year. They will have to tell investors that earnings are likely to continue to decline over the first and second quarters of 2023—but perhaps not as much as they’d anticipated. “Right now, it is all about recalibration,” says Deepali Vyas, global head of the FinTech, Payments, and Crypto practice at Korn Ferry. 


For more information, connect with Korn Ferry’s Global Financial Officers practice.