The first-quarter earnings season is underway, and analysts are predicting a significant decline in profits. This season’s anticipated drop follows a similar decline in Q4 of 2021, the largest since the outbreak of the COVID-19 pandemic. But how much of a decline will be the critical issue, and what could it mean for businesses in the long run?
Experts believe that even a steep decline in profits could signal good news for a rebound later this year. If profits come in lower than expected, it could trigger more and deeper layoffs, salary cuts, and other austerity measures. This would allow leaders to make investments in growth and talent, knowing they have hit rock bottom.
According to Justin Ripley, a senior client partner in the Global Industrial practice at Korn Ferry, meeting expectations this quarter is a win. Ripley notes that if leaders have confidence that the economy has bottomed out, they can swallow another down quarter, making investments in growth and talent, and positioning their companies for the future.
Meeting or beating expectations won’t be easy. Last quarter, the percentage of S&P 500 companies that exceeded profit estimates was the lowest since the second quarter of 2020, when COVID-19 lockdowns in the US went into effect. Analysts are still projecting overall corporate profits to grow this year, but that could change based on what companies report over the next few weeks.
The difficulty in forecasting results suggests businesses are still operating in a transitional environment. Leaders are still unsure about the effects of the banking crisis, interest-rate changes, and slower consumer spending. Yet the labor market remains tight and wages are on the rise.
Leaders are likely to lean more towards austerity than growth. Many large consumer companies are decreasing capital expenditures, or holding them steady, after the across-the-board increases of the last two years. They are managing the cost line more tightly by lowering bonuses and wages, cutting back on benefits, closing support centers, and consolidating real estate.
Leaders aren’t taking big risks; instead, they’re doubling down on strategy and investing in incremental growth. These moves aren’t just about positioning companies for quarterly results or even for the rest of this year. The most important thing stakeholders need to hear from leaders during first-quarter earnings calls isn’t the financial results. It’s how they are prioritizing needs for new, sustainable, and profitable business models.
In conclusion, while a decline in profits is never good news, it may be exactly what businesses need to take stock of their current position and focus on sustainable growth. With a tighter grip on the cost line, careful investment in growth, and a focus on strategic direction, businesses can weather the current transitional environment and position themselves for success in the future.
