What Sort of Earnings Compression Can We Expect?

 

What Sort of Earnings Compression Can We Expect? As I’ve stated, I expect that companies will project economic weakness in 2023. The U.S. consumer is still spending, but that feels more a direct result of negative real interest rates (CPI minus Fed Funds rate) pulling consumption forward.  The key figure for U.S. manufacturing activity is the NFIB Small Business Leading Indicator. And it’s turning negative once again…

U.S. manufacturing numbers were terrible last week. But markets are still stuck in “inflation mode.” At some point, the focus must center on the fundamentals. And it’s clear that the U.S. economy is slowing down.  That said, the Federal Reserve isn’t just raising interest rates in February. It will also be cutting its balance sheet. The Fed cut its balance sheet by more than $43 billion last week alone.  Given the direct relationship between the S&P 500 and the Fed’s balance sheet, I expect natural earnings compression from that trend alone. The question is how weaker business outlooks will weigh on earnings valuations too.