Value Stocks to Lure Investors During Grim Earnings Season

Investors are bracing for a miserable stretch of earnings reports that will likely extend the dominance of value shares as Corporate America grapples with high inflation and rising borrowing costs, the latest MLIV Pulse survey shows.

The broad view on stocks remains deeply pessimistic as earnings heat up this week, with most of the 424 respondents expecting the S&P 500 Index’s slide to deepen.

The results signal no relief for equities already reeling from their biggest annual slump since 2008 amid a toxic mix of hawkish central banks, a strong dollar and the specter of recession.

Over half of survey takers said they’re inclined to invest more in cheaper, so-called value stocks, compared with only 39% three months ago. The sector’s outperformance versus growth last year was the greatest since 2000 as rising rates hurt expensive sectors such as technology by increasing the discount for the present value of future profits.

“We do believe that value names will outperform this season as those companies tend to be much more domestically focused and are benefiting from the pandemic recovery,” said Jay Hatfield, chief executive officer at Infrastructure Capital Advisors in New York.

U.S. companies’ announcements start in earnest on Jan. 13 with results from major banks including JPMorgan Chase & Co. and Citigroup Inc. U.S. equity futures edged higher on Monday, signaling the rally that lifted the S&P 500 at the end of last week was set to extend ahead of Thursday’s key inflation report.

As ugly as fourth-quarter reporting looks to be, subsequent earnings seasons may be worse. Nearly 50% of survey respondents say releases for the April-June period will reflect the most damage from a potential economic contraction. By then, it may be time to exit value — more vulnerable to the economic cycle — and switch back to growth.

A key question this season is how resilient profit margins will prove to be in the face of surging costs. Underwhelming early reports — including from Exxon Mobil Corp., Tesla Inc. and Micron Technology Inc. — show there are reasons to worry, while job cuts portend growing struggles in the technology sector.

Bloomberg Intelligence analysts expect S&P 500 earnings to have fallen 3.1% in the fourth quarter, compared with a year earlier. The S&P 500 Pure Growth Index, which tracks firms in that sector, is projected to post an earnings drop of about 16%, while profits at its value counterpart likely rose 1.4%.

“We’re coming off all-time-high corporate margins and with the inflationary and recessionary pressures in place, we’re likely to see earnings roll over,” said Anneka Treon, a managing director at Van Lanschot Kempen in Amsterdam.

Some 31% of survey participants expect cooling inflation to be the biggest positive driver for earnings this period, with slightly lower tallies for cost-cutting and supply-chain improvements. Consumer-price pressures have ebbed from a four-decade high, and fresh data due Jan. 12 are expected to show further easing.

Yet investors are reluctant to buy in without a clearer read on the Fed. The market trimmed expectations for how high the central bank will push its overnight benchmark this year after data on Friday showed slower-than-projected wage growth and weakness in services.

Volatility Matters

Esty Dwek, chief investment officer at Flowbank SA in Geneva, said she’s more optimistic about equities as “we’re close to the end of the tightening cycle and data continues to point to disinflation.” Yet, she expects volatility to persist before returns recover in the second half.