Projections of an Earnings Upsurge Are Too Rosy, BlackRock Warns

Analysts project that second quarter earnings will be bad, but that corporate profits should improve later in the year. BlackRock Investment Institute, the asset manager’s think tank, begs to differ.

The analysts’ consensus for 2023’s recently completed second period is for a drop in S&P 500 earnings of 7.0% from the year-prior quarter, according to FactSet Research. This would mark a third consecutive quarterly decline.

But then things will move into positive territory, by the analysts’ reckoning: A small increase in the third quarter, 0.1%, and then a much more robust final quarter, 7.6%. Due to the negative results in the year’s first two quarters, the results for the full year would be slightly positive, 0.6%. What about 2024? A solid 12.4%.

Not so fast, says BlackRock. If you remove the top seven companies by market cap—headed by Apple and including such giants as Microsoft and Amazon—then the outlook for the remaining 493 is flat.

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The so-called Magnificent Seven claim $11 trillion of the broader index’s $38 trillion in market value, or 29%, Bank of America Securities estimated. Plus, the seven account for 73% of the S&P 500’s gains in the first half, the firm calculated.

BlackRock pointed out that overall profit margins have contracted since last year, as the post-pandemic economy moved more toward the service sector, which has lower profitability than goods production. As a percent of gross domestic product, corporate profits dropped to minus 4.1% in the first quarter, from positive 6.6% last year and plus 22.6% in 2021, per the U.S. Bureau of Economic Analysis.

This has happened in the face of Federal Reserve rate raises and a tight labor market, BlackRock noted: “If rate hikes are not squeezing the labor market, where will the squeeze come from? Corporate profit margins, we believe, as wage gains and still-solid employment take a bigger toll on margins than in the past.”

Of course, the profit situation is buoyant for the Magnificent Seven. They have not yet released their results for the second quarter, but forecasts are upbeat. Microsoft, for instance, is expected to log a 14.3% year-over-year boost in earnings per share when it reports on July 26.

BofA, unlike many Wall Street houses, expects a mild recession to take place later this year. BlackRock does not go that far, but in its mid-year investment review, it predicted a “growth slowdown” beginning by year-end: “We think earnings will come under more pressure in the second half of the year. We think this macro environment is not a friendly one for broad asset class exposures,” meaning the S&P 500 sans the Magnificent Seven.