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Chicago, IL – September 29, 2022 – Zacks Director of Research Sheraz Mian says, "Excluding the Energy sector, Q3 earnings are expected to be down -5.7% at present, a significant decline from +2.1% at the beginning of July."
Are Earnings Estimates Out of Sync with the Economy?
Note: The following is an excerpt from this week's Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>
Here are the key points:
· The widely held view that earnings estimates remain out of sync with the economic ground reality is erroneous as it looks at the aggregate picture at the index level where estimates for the Energy sector have consistently been positive.
· Estimates for the last two quarters of this year and full-year 2023 are coming down, even though positive revisions to the Energy sector continue to partly offset estimate cuts elsewhere.
· The +1.0% earnings growth expected for the S&P 500 index in 2022 Q3 is down from +7.2% at the start of the period. Excluding the Energy sector, Q3 earnings are expected to be down -5.7% at present, a significant decline from +2.1% at the beginning of July.
Companies with fiscal quarters ending in August have been coming out with quarterly reports lately. Oracle (ORCL - Free Report) , Adobe (ADBE - Free Report) , Costco (COST - Free Report) , FedEx (FDX - Free Report) , Lennar (LEN - Free Report) , and a total of 12 such S&P 500 members have reported results thus far.
As we have pointed out here before, the Q3 earnings season will really get going in mid-October when the big banks will come out with their results. But the early reports from Oracle and others for their fiscal periods ending in August also get counted as part of the Q3 earnings season tally.
The preceding earnings season turned out to be better than expected; not great, but not bad either. Given the unprecedented Fed tightening and the resulting macro uncertainties, market participants feared the corporate profitability picture would start deteriorating.
We saw some companies miss estimates and guide lower. But for the most part, the market's earnings fears didn't bear out. That said, the strong U.S. dollar has joined the pre-existing headwinds of logistical challenges and inflationary pressures in weighing on corporate profitability. We will have to wait and see whether the Q3 reporting cycle will bring in the long-feared earnings downturn.
Estimates have started coming down, with the overall revisions trend turning negative even after accounting for the persistent favorable revisions trend enjoyed by the Energy sector.
If we look at the evolution of Q3 earnings growth expectations on an ex-Energy basis, the expected growth rate has dropped from +2.1% on July 6th to -5.7% today.
Aggregate S&P 500 earnings outside of the Energy sector have declined -6.5% since mid-April, with double-digit percentage declines in Retail (down -14.9%), Construction (-16.5%), and Tech (-11.2%). Estimates have been coming down in the Consumer Discretionary, Industrial Products, Medical and Finance sectors as well.
The Overall Earnings Picture
Beyond Q2, the growth picture is expected to modestly improve, as you can see in the chart below that provides a big-picture view of earnings on a quarterly basis.
Please note that a big part of this year's growth is thanks to the strong momentum in the Energy sector whose earnings are on track to grow +137.2% this year. Excluding this extraordinary Energy sector contribution, earnings growth for the rest of the index would be up only +0.4%. This flat earnings picture for this year is also in-line with the economic ground reality.
Earnings next year are expected to be up +6.2% as a whole and +8% excluding the Energy sector. This magnitude of growth can hardly be called out-of-sync with a flat or even modestly down economic growth outlook. Don't forget that headline GDP growth numbers are typically in real or inflation-adjusted terms while S&P 500 earnings discussed here are not.
As mentioned earlier, 2023 aggregate earnings estimates on an ex-Energy basis are already down -6.5% since mid-April. Perhaps we see a bit more downward adjustment to estimates over the coming weeks, after we have seen Q3 results. But we have nevertheless already covered some ground in taking estimates to a fair or appropriate level.
This is particularly so if whatever economic downturn lies ahead proves to be more of the garden-variety rather than the last two such events. Recency bias forces us to use the last two economic downturns, which were also among the nastiest of economic downturns in recent history, as our reference points. But we need to be cautious against that natural tendency as the economy's foundations at present remain unusually strong.
Why Haven't You Looked at Zacks' Top Stocks?
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.
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Zacks Earnings Trends Highlights: Oracle , Adobe, Costco, FedEx and Lennar
For Immediate Release
Chicago, IL – September 29, 2022 – Zacks Director of Research Sheraz Mian says, "Excluding the Energy sector, Q3 earnings are expected to be down -5.7% at present, a significant decline from +2.1% at the beginning of July."
Are Earnings Estimates Out of Sync with the Economy?
Note: The following is an excerpt from this week's Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>
Here are the key points:
· The widely held view that earnings estimates remain out of sync with the economic ground reality is erroneous as it looks at the aggregate picture at the index level where estimates for the Energy sector have consistently been positive.
· Estimates for the last two quarters of this year and full-year 2023 are coming down, even though positive revisions to the Energy sector continue to partly offset estimate cuts elsewhere.
· The +1.0% earnings growth expected for the S&P 500 index in 2022 Q3 is down from +7.2% at the start of the period. Excluding the Energy sector, Q3 earnings are expected to be down -5.7% at present, a significant decline from +2.1% at the beginning of July.
Companies with fiscal quarters ending in August have been coming out with quarterly reports lately. Oracle (ORCL - Free Report) , Adobe (ADBE - Free Report) , Costco (COST - Free Report) , FedEx (FDX - Free Report) , Lennar (LEN - Free Report) , and a total of 12 such S&P 500 members have reported results thus far.
As we have pointed out here before, the Q3 earnings season will really get going in mid-October when the big banks will come out with their results. But the early reports from Oracle and others for their fiscal periods ending in August also get counted as part of the Q3 earnings season tally.
The preceding earnings season turned out to be better than expected; not great, but not bad either. Given the unprecedented Fed tightening and the resulting macro uncertainties, market participants feared the corporate profitability picture would start deteriorating.
We saw some companies miss estimates and guide lower. But for the most part, the market's earnings fears didn't bear out. That said, the strong U.S. dollar has joined the pre-existing headwinds of logistical challenges and inflationary pressures in weighing on corporate profitability. We will have to wait and see whether the Q3 reporting cycle will bring in the long-feared earnings downturn.
Estimates have started coming down, with the overall revisions trend turning negative even after accounting for the persistent favorable revisions trend enjoyed by the Energy sector.
If we look at the evolution of Q3 earnings growth expectations on an ex-Energy basis, the expected growth rate has dropped from +2.1% on July 6th to -5.7% today.
Aggregate S&P 500 earnings outside of the Energy sector have declined -6.5% since mid-April, with double-digit percentage declines in Retail (down -14.9%), Construction (-16.5%), and Tech (-11.2%). Estimates have been coming down in the Consumer Discretionary, Industrial Products, Medical and Finance sectors as well.
The Overall Earnings Picture
Beyond Q2, the growth picture is expected to modestly improve, as you can see in the chart below that provides a big-picture view of earnings on a quarterly basis.
Please note that a big part of this year's growth is thanks to the strong momentum in the Energy sector whose earnings are on track to grow +137.2% this year. Excluding this extraordinary Energy sector contribution, earnings growth for the rest of the index would be up only +0.4%. This flat earnings picture for this year is also in-line with the economic ground reality.
Earnings next year are expected to be up +6.2% as a whole and +8% excluding the Energy sector. This magnitude of growth can hardly be called out-of-sync with a flat or even modestly down economic growth outlook. Don't forget that headline GDP growth numbers are typically in real or inflation-adjusted terms while S&P 500 earnings discussed here are not.
As mentioned earlier, 2023 aggregate earnings estimates on an ex-Energy basis are already down -6.5% since mid-April. Perhaps we see a bit more downward adjustment to estimates over the coming weeks, after we have seen Q3 results. But we have nevertheless already covered some ground in taking estimates to a fair or appropriate level.
This is particularly so if whatever economic downturn lies ahead proves to be more of the garden-variety rather than the last two such events. Recency bias forces us to use the last two economic downturns, which were also among the nastiest of economic downturns in recent history, as our reference points. But we need to be cautious against that natural tendency as the economy's foundations at present remain unusually strong.
Why Haven't You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.