Corbin Advisors, a strategic consultancy accelerating value realization globally, today released its quarterly Earnings Primer®, which captures trends in institutional investor sentiment. The survey, which marks the 52nd issue of Inside The Buy-side®, was conducted from September 6 to October 3, 2022, and is based on responses from 82 institutional investors and sell side analysts globally, representing ~$6.1 trillion in equity assets under management.
Following last quarter’s survey that found increasingly downbeat investor sentiment amid continued high inflation and fears of an imminent recession, this quarter’s survey registers the most bearish investor sentiment and perceived management tone in more than a decade, excluding the onset of COVID-19, with the compounding effects of known headwinds and new emerging concerns driving continued expectations for a sequential downshift and challenged 2023.
After positive investor sentiment reversed course in September 2021, breaking a five-quarter streak of increasingly bullish views, and inflected negatively in March 2022, perceived management tone has now followed suit, with 46% of investors and analysts describing executives as downbeat, also the lowest level of optimism recorded in more than a decade, excluding the onset of COVID-19. Sentiment is colored by persistent and strengthening headwinds, most notably inflation (70% concerned) and Fed policy (63%), and the addition of new outsized worries, specifically FX headwinds, inventory, and U.S. midterm elections.
As a result, 52% believe we are currently in a recession or will be by year end, with the remainder largely expecting a broad-based contraction in the first half of 2023. Indeed, 64% cite demand as the top focus area to address on upcoming earnings calls, up from 39% in Q2, as investors and analysts forecast the impact of the Fed funds rate, which is expected to be 4.0% or higher at the end of 2022.
Kim Forrest, Chief Investment Officer/Founder at Bokeh Capital Partners commented, “My top concern is the Fed not understanding they are driving the dollar to unhelpful levels and not understanding we are in a recession and higher rates may slow inflation but cause a deeper recession.”
For the third quarter, expectations for organic growth, margins, EPS, and free cash flow are all lower, with fewer than 15% expecting Improving performance across these measures. Continuing, more survey participants anticipate additional full year 2022 guidance cuts, believing that margin and EPS performance is more at risk than revenue.
“A hawkish Fed has continued to send chills through the markets, with interest rates, inflation, and a recession all remaining front and center. Investors are bracing for the worst and in the process have shifted emphasis from growth to margins and cash conservation. As we downshift from 2022 guides that did not assume many of the current headwinds, including the Ukraine-Russia war, which has persisted longer than anyone expected, the ensuing energy crisis in Europe, rampant inflation, and the increasing cadence at which the Fed has hiked rates, the market continues to capitulate. As these themes have yet to reach a conclusion, investors are looking for companies to take decisive actions, specifically around capital deployment and cost cutting,” said Rebecca Corbin, Founder and CEO of Corbin Advisors.
A sign of just how downbeat investors are on the economic outlook and company performance, more investors, 58%, favor debt reduction as the leading use of cash, up from 50% last quarter and more than at the onset of COVID-19, while 44% encourage companies to hold dry powder. Reinvestment also sees its lowest support level ever recorded, while 48% now encourage companies to moderate capex.
Corbin continued, “A growing number of companies are experiencing a slowdown and layoffs are once again making headlines and happening quietly, chipping away at consumer strength. This slide will likely continue at least through the end of the year with an opportunity to course correct in January, when corporations reset the bar with reality-based 2023 outlooks. At that time, more certainty will be injected into earnings estimates, paving the way for executives to over deliver on under promises and begin to decouple share price from the economic malaise. Of course, the outcome will also depend on the effectiveness of monetary policy reigning in inflation and clarity that the interest rate cycle is approaching its peak.”
As for investing patterns, 50% report Holding or Rotating, down from 69% last quarter, while Net Buyers increased to 24% and Net Sellers more than doubled to 26%, the highest level since December 2018. Tech and Communications sectors are among the largest bull gainers, while bears move into Materials and Industrials sectors following a flurry of negative pre-announcements.