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Citation - Fourth Quarter 2022



Portfolio Manager
Estimated reading time: 11 minutes 28 seconds

The broad consensus coming into 2023 is that we are facing the likelihood of economic recessions in a variety of regions across the globe. This is primarily due to financial conditions weakening around the world as interest rates rise to combat significant inflationary pressure, coupled with the reduction in significant government stimulus (which, in the past, aided consumers and businesses during the worst of the pandemic) and the persistent war in the Ukraine, which has affected everything from energy prices to the price of basic commodities.

The one thing that analysts and pundits cannot predict is how deep this recession will be, and when in 2023 it will be upon us, if at all.

Economic Indicators

There are a variety of economic indicators that can give us an indication of the health of an economy. These include things like the unemployment rate, retail sales, consumer confidence and leading indicators, including PMIs. However, generally, these indicators are what are known as lagging indicators as they provide information well after the fact. Take for example gross domestic product (GDP) which gives us an indication of economic growth. The indicator can come out months after the end of any quarter providing insight far too late for any meaningful decision making. Financial markets tend to price data more aggressively and even consider the future rather than the relative past. Thus, if we want to make decisions that are timely and informative, we have to consider information sources that are more current.

Corporate earnings can give us information that is more timeous as well as relevant given the range of companies that provide data. For instance, you could get information about consumer demand from restaurant companies, business data from companies that provide supply to other companies, or even data about specific facets of our economies such as banking or shipping.

Financial market followers may claim that even earnings data is not fast enough, and they may be right. In some economies earnings data is only available in financial reports that come out half yearly (which is the case in South Africa), but there are markets where earnings data comes out as often as quarterly. A crucial region, where this is the case, is the United States. This is important because US companies make up around two thirds of the market value of all companies globally, making the US market integral in understanding the state of a variety of economies as well as their own. While quarterly data may seem slow companies will often attempt to give an accurate picture around current trends providing up-to-date insight, outlook for the future in the form of commentary and sometimes outright forecasts. This can provide important insights into the state of the global economy.

Global Company Earnings Trends

In the following tables, I will illustrate the state of earnings and the trend that has transpired through the worst part of the pandemic (in 2020) all the way to the end of the third quarter of last year (ending in September). The current earnings season is underway with companies reporting on the fourth quarter period, from October to the end of December 2022. As it is January, there aren’t many companies that have reported just yet, but there have been some important insights from companies in the financial, services and retail sector which I will share instead of aggregate information. To make the information more tangible I have broken down the earnings data into sectors using the Global Industry Classification Standard (GICS) method. While this may be a popular method of classification it may be new to some of you. In the next paragraph I list the different sectors that are used in the classification and break them down for you.

  • Communication services – this sector is a relatively new one and contains a variety of companies across different segments. The broad categories include telecommunications companies (like Verizon and AT&T), cable companies (like Comcast), social media companies (like Google and Facebook) as well as gaming companies (like Activision Blizzard and EA Games).
  • Consumer Discretionary – the sector contains stocks relating to consumer purchases that are wants more than needs. Some large companies include Nike, Louis Vuitton, and Amazon.
  • Consumer Staples – this sector is more about consumer needs than wants. Stocks in this sector are generally considered more defensive to poor economic conditions for this reason. Large stocks in the sector include Proctor & Gamble, Walmart, and Colgate Palmolive.
  • Energy – this sector includes everything relating to energy, including exploration to find new energy (such as oil), the refining of energy, transport of energy and even other types of energy companies like renewable energy companies. Large companies in the sector are the likes of Chevron, Exxon Mobil, and Shell.
  • Financials – this sector includes a number of stocks in the financials space. You may think banks on first reflection, but the sector also includes stocks in asset management, insurance, financial technology, and payments. Large stocks in the sector includes the likes of JP Morgan, Bank of America, Berkshire Hathaway, and BlackRock.
  • Health Care – this sector contains a variety of sub-sectors relating to health care. This includes pharmaceuticals, biotechnology, hospitals, health care services and equipment. Large stocks in the sector include Pfizer, Johnson & Johnson, Merck, and Novo Nordisk.
  • Industrials – these companies are generally part of the wider supply chain and manufacture a variety of heavy equipment and machinery. Stocks in this sector include UPS, Caterpillar, Boeing, Lockheed Martin, and 3M.
  • Information Technology – these stocks form the basis of our modern world and tend to be split in terms of IT hardware and software. Large companies in the sector include Apple, Microsoft, Visa, Nvidia, Mastercard, and Adobe.
  • Materials – these are companies that are generally involved with the sale and mining of a variety of commodities. Stocks in the sector include Linde, Freeport-McMoRan, Sherwin Williams, Corteva, and Ecolab.
  • Real Estate – this is one of the more understandable sector labels but the spectrum of real estate from a listed company perspective is often surprising. Sub-sectors include malls, office properties, residential properties, warehouses, and even data centres. Large stocks in the sector include American Tower, Public Storage, Simon Property Group, and Prologis.
  • Utilities – in South Africa our utilities are all publicly owned but in the rest of the world it is very common to have listed utilities for electricity, water, and gas. Large stocks in this sector include Duke Energy, Dominion Energy, American Electrical Power, and NextEra Energy.

Now that we understand the sectors in more detail, we can start to assess the earnings that they have achieved over the last few quarters. In table 1 below, the rows reflect the different sectors while the columns reflect the growth that that sector has had versus the same quarter in the previous year. The columns are labelled according to their year and quarter. This means that “20Q3” refers to the third quarter of 2020. We call this type of assessment a “year-on-year” assessment. Typically, if a stock or sector has had two consecutive quarters of negative growth, we could call that an earnings recession, very much like how we identify economic recessions for countries.

Table 1 – US Earnings by Quarter (Source: Bloomberg)

You will see in Table 1 that there are a variety of negative quarters throughout the calendar year of 2020. This was due to the COVID pandemic and the resulting lack of economic activity. You can see how the pandemic affected a variety of sectors, with the only one coming out unscathed being health care. This makes sense given the nature of any pandemic. You will also notice a period of strong growth in the 2021 quarters as industries recovered quickly from the COVID pandemic and economic activity resumed. The year 2022 was marred with higher inflation, interest rates, a war, and altogether worse economic activity. This has taken its toll which you can see from the developing red in columns 22Q2 and 22Q3. These are the most recent full quarters, and you can see where the pain has been felt: communication services (which has some large technology and marketing exposure), consumer discretionary, financials, IT, materials, and even health care. You can also see a general worsening trend across a variety of sectors from the second quarter to the third quarter of 2022.

An important question is whether this has been the case for other nations? It is true that other countries have had significant increases in inflation, but interest rates have not increased as markedly as they have in the US. Has this protected companies in other jurisdictions? Table 2 and table 3 reflect earnings data for European and emerging market (EM) companies respectively. You’ll note that the columns change from “Q” to “S”, this signifies that the data that you are seeing reflects the half year data rather than quarterly figures.

Table 2 – European Earnings by Quarter (Source: Bloomberg)

The European data in Table 2 reflects the same trend as the US with earnings being weak in the 2020 period, a period of recovery in 2021, and then weakness resuming in the latter part of 2022. The EM data in Table 3 is very similar with a declining trend and variety of negative sectors.

Table 3 – Emerging Market Earnings by Quarter (Source: Bloomberg)

We have been told that the world is on the precipice of an economic recession that should start in 2023. The earnings data above clearly supports this sentiment, as a variety of companies already feature negative earnings growth. The last table, Table 4, is for the US and reflects the number of companies that have negative year-on-year earnings growth already, marked as a percentage. For these companies it must feel like an earnings recession in real time already.

Table 4 – Percentage of US Companies with Negative Earnings per Quarter (Source: Bloomberg)

It is again clear to see the pain caused by the COVID-19 pandemic as a variety of sectors had the majority of companies featuring negative earnings growth thanks to poor economic conditions. Crucially, in 2021, most numbers reduced dramatically reflecting a world in recovery with positive earnings growth. As you can see in the latter columns of Table 4 that trend is again worsening with a variety of sectors featuring a figure larger than 50%, implying these companies will feature negative growth in earnings on a year-on-year basis. As mentioned earlier we are receiving the fourth’s quarters data in real time.

Thus far 33 companies have reported on the S&P 500 (at the time of writing on the 17th of January 2023) and the aggregate growth rate in earnings is -8.9%, with three out of the six sectors that have reporting companies reflecting negative average earnings growth. While still early in reporting season we are monitoring these companies closely for further signs of deterioration in earnings at an aggregate level.


Within the Citadel Asset Management (CAM) team, we pride ourselves on an investment process and philosophy without hubris and thus a plethora of data points to help us come to a conclusion about the world around us. Corporate earnings, and their impact on the global economy, is a crucial metric when looking to understand the state of the global markets. The trend we are seeing is suggesting a decline. While the prevailing consensus has been that there will be an economic recession in 2023 there are a variety of commentators who disagree with that view and make it known in a variety of sources. At CAM, it is important that we develop our own, reliable view as an input in our own modelling of economic conditions that help us to invest on your behalf. This article gives you some insight into the type of data we look at in formulating our view and hopefully gives you something tangible to point to, as evidence of where the global economy sits at the start of 2023.

If you have any questions or comments, please reach out to your Citadel advisor.