Wall Street is likely poised to scale back its forecasts for corporate earnings, with ugly consequences for stocks, so investors will want to identify the few companies that are immune.
Analysts’ published calls on earnings—a key point for stock investors to watch—are far too optimistic. In aggregate, analysts’ estimates of 2022 earnings per share for S&P 500 companies have risen this year, even though inflation has remained higher than expected and the Federal Reserve has made it clear it will respond with a series of big interest-rate increases.
A recession is increasingly likely, but company analysts can’t immediately quantify how far sales might fall. Their formally published earnings estimates are mostly based on profits from prior quarters, when times were better.
“Estimates need to come down,” said Matthew Stucky, senior portfolio manager at Northwestern Mutual Wealth Management. “It would be incredibly unusual if we have a slowdown and rates are up significantly, that profits can continue to expand at the rate that estimates have them.”
The issue for the broader market is that sales at many companies have some sensitivity to macroeconomic developments. Consumer discretionary companies rely on peoples’ willingness to spend the extra dollar. Manufacturers rely on other companies investing in new projects to meet strong demand. Banks lend more when economic activity is strong.
Some businesses, though, can perform just fine even when the economy isn’t. A lot of those companies have high growth prospects because they sell products and services that customers are rapidly adopting. That can often bring sales and profits that beat expectations.
Strategists at Morgan Stanley identified some of the stocks that are less sensitive to a broad reduction in profit estimates. These names have “idiosyncratic” drivers of sales and earnings, meaning their results are less dependent on the macroeconomic environment.
All stocks on the strategists’ list are rated Overweight by the bank’s analysts. Here are three of the best examples.
Match Group (ticker: MTCH), the $20 billion leader in dating apps, is on the list of rapid growers. Online dating still isn’t in the later stages of adoption, and Match is rolling out its Hinge app throughout the entire globe. Analysts expect sales— comprised of advertising and subscriptions—to compound at an annual rate of above 15% to over $7 billion by 2027, according to FactSet . Expectations are that earnings per share will grow more than 20% annually.
Zoom Video Communications (ZM) is also still expanding quickly. Even though the market has had to come to terms with the fact that the company likely saw its best days of growth as people shifted to videoconferencing during the pandemic, sales are still expected to compound at 13% annually to more than $8 billion by 2027.
At Eli Lilly & Co (LLY), sales are expected to compound at an annual rate of about 9% to $45 billion by 2027. That means EPS growth is likely to come in at about 17% over that stretch, data on FactSet indicates. Management—and analysts—expect new products to soon enter more advanced stages of testing. Those include drugs like Tirzepatide, an obesity treatment whose sales are expected to rise to more than $5 billion by 2027 from just $263 million this year.
There is one caveat. High-growth stocks are most sensitive to rising yields for long-dated bonds. A surge in yields that has slammed growth stocks for much of 2022 paused over the past week, much to the delight of investors in those companies, but if the rise resumes, the shares could struggle.
At least the Street’s estimates of those companies’ earnings are likely to remain relatively stable.
Write to Jacob Sonenshine at firstname.lastname@example.org