Experts say the upcoming earnings season will be overshadowed by the broader economic climate, with interest rates and inflation data more closely watched than individual company reports.

Companies have been signalling a lacklustre earnings season for a wide variety of reasons, many of them global. 

With economic data showing a slowdown as 2022 came to a close and economists divided over whether 2023 will bring a recession or a soft landing, corporate earnings will provide insight into how businesses weathered the final quarter of the year — and signal what's in store for the year ahead. 

“There's no shortage of headwinds impacting earnings, such as reduced demand, inflated inventories, higher costs,” said Lesley Marks, chief investment officer of equity at Mackenzie Investments.

Lululemon raised its revenue guidance but lowered its forecast on margins, saying the company is navigating a “a dynamic macro-backdrop.” Canada Goose previously revised its full-year outlook for 2022 due to a decline in sales in China. 

Some companies say they will see earnings in the final quarter of 2022 affected by weather, like Cenovus Energy Inc., which expects its refinery throughput to be weaker due to extreme winter weather, operational issues and third-party pipeline outages. 

However, some think the market may be in for a pleasant surprise from the bigger earnings picture. 

"There's generally a pessimistic view as we head into earnings season, in good times and bad," said Michael Currie, senior investment adviser at TD Wealth, but he thinks that pessimism is often overshot.

Right now, the bigger economic picture of inflation and interest rates is much more important to investors than individual earnings reports, said Currie.

In 2022, investors were always waiting for the other shoe to drop, said Greg Taylor, chief investment officer at Purpose Investments, entering each earnings season anticipating a slump and then rallying with relief when results were better than expected.

This earnings season feels similar, said Taylor, but it remains to be seen whether results will be something to rally over.

“It does feel like companies have done a decent job controlling the expenses,” he said. 

However, markets started 2023 with an upward bounce so if there’s a relief rally, it may be subdued since it won’t be coming off of the lows seen entering other earnings seasons, he said. 

Much of the focus this earnings season will be on what companies have to say about their outlook for 2023, said Angelo Kourkafas, an investment strategist at Edward Jones.

“There's a lot of macroeconomic uncertainty, and investors are going to be looking for signs, looking for any type of guidance for the year,” he said. 

Marks said market expectations for 2023 earnings seem a little high right now, but investors may lower the bar once they've seen company outlooks from Q4 earnings.  

“It'll be interesting to see if on the Q4 earnings report season, we see those earnings expectations start to come down for this year,” she said. 

Some of the early earnings reports have been OK, said Taylor, with top lines holding strong even as margins start to falter. But the U.S. banks are what everyone is really watching, he said. 

“There's definitely some nervousness and everyone's still trying to figure out how the consumer is going to do holding up with higher mortgage rates and higher interest costs,” he said. “But it ... could be a bit of a chance for people to sell the rumour, buy the news.”

So far companies have been relatively quiet when it comes to guidance on earnings, noted Taylor.

He predicts there will be a wider than usual dispersion in results between companies and industries, making it more of a stock-picking environment for investors. 

Aritzia’s earnings reported Thursday are a good example of the difficulties some companies have been facing with inventory and demand amid geopolitical volatility, Marks said.

The company saw sales rise, but is also dealing with inflated inventories. 

Though some companies have already signalled their earnings may be dampened, Kourkafas thinks there’s room for some good news.

“We know based on the backward looking data (that) consumer demand has held up fairly well in Q4 of last year, so I would imagine, given that the bar has been lowered heading into the earning season, that results could be decent,” he said. 

However, Kourkafas said he thinks earnings are still at risk of being revised downward as the year progresses. 

“I think that the earnings risk is clearly ahead of us,” he said. “I don't think it's fully factored in, in the current consensus estimates.”

Others agree that the upcoming year will see more of the volatility that characterized 2022. 

“2023 is looking to be what we're calling a triple-B year: bumpy, boring and below average,” said Ashish Utarid, assistant vice-president of investment strategy at IG Wealth Management.

However, he thinks investors are approaching earnings with some optimism, having already priced in the expected growth decline six to eight weeks ago.

“The S&P 500 has had a pretty good rebound in the last month,” he said.

“So people are a little bit more optimistic ... in spite of a manufacturing recession and (an) earnings recession.”

This report by The Canadian Press was first published Jan. 13, 2023.