How Will Q3 and Q4 EPS Seasons Play Out?
Companies will largely take a conservative approach to guidance on the Q3 and Q4 EPS calls. The rubber will meet the road on the Q4 earnings calls in January when companies issue their initial 2024 guidance. That initial 2024 guidance will likely spook investors and knock stock prices back significantly.
Hopefully management teams stopped listening to their investment bankers as it relates to interest rates. Since 2022 we have said that elevated interest rates would be here for an extended period of time, at least until some of the monetary slack had been removed from the system. Conversely, investment bankers and the financial media had been pushing the “Fed Pivot” narrative since 2H 2022. That narrative died during the Fed’s most recent FOMC meeting on September 20th. Management teams will execute more reductions in force (RIFs) to help offset the higher cost of capital. RIFs will occur in October, November less so in December and in a big way during January.
Q3 EPS Calls: Management teams will talk of “macro uncertainty” and being proactive in terms of navigating through the uncertainty, largely by controlling operating expenses and limiting discretionary spending. Some companies will announce RIFs on their Q3 EPS calls. I believe companies will announce RIFs in October, November, less so in December and in a big way during January.
Management teams (MSFT, NVDA, GOOGL, ORCL, AMZN), will talk-up Gen AI, but that game will only play so far in this market. It should not play at all other than for NVDA, which is the only public company that will see significant Gen AI revenues in the near-term.
Q4 EPS Calls: Technology companies will issue initial 2024 guidance that will be incrementally more conservative than initial annual guidance issued in 2022 and 2023. We are in a recession that will further deteriorate this quarter and early next year. Few management teams are experienced in navigating through a recession while the cost of capital remains high. The COVID recession was a one-off (I hope) as all companies got bailed out via fiscal and monetary stimulus – both of which were provided at unprecedented levels. Let’s hope that helicopter money, zero percent interest rates and QE are of the past. Few management teams have experience grinding through an extended recession. Those that do have an enormous tactical advantage over competitors that lack such experience.