While this earnings season is just getting under way, in terms of the surprise factors it has so far been on trend—with a rising number of positive surprises and falling negative and in-line surprises. Second-quarter earnings are expected to be exceptionally poor, where the progression of analysts lowering their earnings estimates over the last six months has been far worse than either the historical average or the median.  

Many believe this will mark the trough in earnings, as it will be the third consecutive quarterly decline. For that, we will have to wait and see. We will be watching four main areas that are likely to exert margin pressure. The first is the extent to which higher interest rates are slowing growth and who is being impacted the most. Second will be the extent to which companies have yet again been able to engage in “greedflation,” or marking up prices to compensate for lower volume growth. As prices have started to come back down, and consumers are increasingly balking at higher prices, this is likely to put more downward pressure on margins. Lastly, we are keen to see how much of a toll unit labor costs are taking as companies hoard labor, fearful of no economic downturn, or not being able to hire them back once the economy recovers. Furthermore, NIPA data through the first quarter, which tend to lead S&P 500 profits and the economy more generally, are showing no signs of turning.