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With September-quarter results from more than 85% of S&P 500 members already out, the bulk of the Q3 reporting cycle is now behind us.
The overall takeaway from the Q3 earnings season was one of relief and reassurance, with actual quarterly reports belying pre-season fears of an impending ‘earnings cliff’. As we have repeatedly pointed out, the picture that emerged from the Q3 earnings season wasn’t great, but it wasn’t bad either. To that end, here are the three things we learned from the Q3 earnings season.
First, growth is fading. This is no surprise, as the global economy is going through a synchronized slowdown, under the combined effects of rising interest rates in response to inflationary pressures, still-lingering logistical challenges that have started to ease up and China’s continuing zero-Covid restrictions.
The orange bars in the chart above represent revenue growth. So, for 2022 Q3, revenues are on track to grow +11.3% from the same period last year even though earnings are only expected to be up +1.6%. This seemingly elevated revenue growth is a direct function of pricing power, with companies able to pass on rising input costs to end consumers. We intuitively know that this can’t go on forever and current projections for the next three quarters bears out this intuition.
Second, margins are holding up better than most of us would have expected. Net margins in the aggregate have been below the year-earlier in each of the last three quarters, but the pressures aren’t distributed evenly across the different sectors.
If we look at the Q3 results have come out already, net margins are down 130 basis points for the 429 S&P 500 members in the aggregate, with 10 of the 16 Zacks sectors suffering margin contraction. On the flip side, four sectors enjoyed higher margins relative to the year-earlier period, led by the Energy sector.
Sectors suffering the biggest margin squeeze include Technology, Basic Materials and Finance. We discussed last week the earnings outlook for the Technology sector, particularly what we call the ‘Big 5 Tech Players’ – Apple, Amazon, Alphabet, Microsoft and Meta. For reference, please read – Making Sense of Big Tech Earnings After Amazon and Meta Tumble.
We pointed out in that note how each of these Tech leaders was in a mad rush over the last few year-plus to add employees, which has left them with bloated payroll expenses. The issue is particularly acute with Meta and Amazon, whose net margins this year are expected to be 1274 basis points and 586 basis points, respectively below the 2021 level.
The margin issue is hardly restricted to the ‘Big 5 Tech Players,’ as the issue is very much present with the broader Tech sector.
Third, the narrative that earnings estimates remain too high is misleading if not altogether wrong Regular readers of our earnings commentary know that we have consistently flagged the persistent cuts to forward earnings estimates over the last few months.
We take earnings estimate revisions very seriously as they form the core of our stock rating system. The way we see it, earnings estimates for 2023 outside of the Energy sector peaked in April and have been steadily trending down since then.
Since mid-April, 2023 earnings estimates in the aggregate have come down by -7.4% for the S&P 500 index as a whole and -10.4% on an ex-Energy basis. The cuts to estimates have been particularly notable for the Tech (down -17.4% since mid-April), Construction (-21.5%), Retail (-18.2%), Industrial Products (-11.8%), Consumer Discretionary (-15.1%) and Aerospace (-11.5%).
If we look at Amazon and Meta, 2023 earnings estimates for Amazon have come down -19.8% for Amazon (from $21.7 per share to $1.74 per share) and -30.4% for Meta (from $11.15 per share to $7.76 per share) over the last 3 months.
This goes to our earlier comment about the revisions narrative being misleading if not altogether wrong. Estimates have been coming down for a while now and are down more than -10% for 2023 on an ex-Energy basis since mid-April, as we stated earlier.
There are some in the market who think that 2023 earnings should be below the 2022 level instead of the current expected +3.5% growth simply because the U.S. economy is expected to go through a moderate recession.
I am not suggesting that 2023 earnings can’t be below the 2022 level; they can be, and current revisions trends are likely headed there. But it is wrong to expect moderate declines in ‘real’ GDP to automatically result in ‘nominal’ or non-inflation adjusted corporate earnings to also decline. Corporate revenues and earnings are ‘nominal’ values and will reflect the effects of inflation. Inflation is expected to come down in 2023, but nevertheless remain positive.Q3 Earnings Season Scorecard
Including all of the results through Friday, November 4th, we now have Q3 results from 429 S&P 500 members that combined account for 85.8% of the index’s total membership.
The bulk of the Q3 earnings season for the large-cap companies in the S&P 500 index is now behind us. But there are still a ton of small and mid-cap companies that have yet to report quarterly results. This week will bring in results from more than 1,000 companies, including 30 S&P 500 members.
For the 429 index members that have reported results already, total earnings are up +2.2% from the same period last year on +12.4% higher revenues, with 70.9% beating EPS estimates and 67.8% beating revenue estimates.
Here is how the 2022 Q3 earnings and revenue growth rates for these 429 companies compares across different periods.
The EPS and revenue beats percentages were notably on the weak side earlier in the reporting cycle. But as you can see above, they are very much within the historical range by now.
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.
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/performance for information about the performance numbers displayed in this press release.
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Apple, Amazon, Alphabet, Microsoft and Meta are part of Zacks Earnings Preview
For Immediate Release
Chicago, IL – November 7, 2022 – Zacks.com releases the list of companies likely to issue earnings surprises. This week’s list includes Apple (AAPL - Free Report) , Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) , Microsoft (MSFT - Free Report) and Meta (META - Free Report) .
3 Things We Learned from Q3 Earnings Season
With September-quarter results from more than 85% of S&P 500 members already out, the bulk of the Q3 reporting cycle is now behind us.
The overall takeaway from the Q3 earnings season was one of relief and reassurance, with actual quarterly reports belying pre-season fears of an impending ‘earnings cliff’. As we have repeatedly pointed out, the picture that emerged from the Q3 earnings season wasn’t great, but it wasn’t bad either. To that end, here are the three things we learned from the Q3 earnings season.
First, growth is fading. This is no surprise, as the global economy is going through a synchronized slowdown, under the combined effects of rising interest rates in response to inflationary pressures, still-lingering logistical challenges that have started to ease up and China’s continuing zero-Covid restrictions.
The orange bars in the chart above represent revenue growth. So, for 2022 Q3, revenues are on track to grow +11.3% from the same period last year even though earnings are only expected to be up +1.6%. This seemingly elevated revenue growth is a direct function of pricing power, with companies able to pass on rising input costs to end consumers. We intuitively know that this can’t go on forever and current projections for the next three quarters bears out this intuition.
Second, margins are holding up better than most of us would have expected. Net margins in the aggregate have been below the year-earlier in each of the last three quarters, but the pressures aren’t distributed evenly across the different sectors.
If we look at the Q3 results have come out already, net margins are down 130 basis points for the 429 S&P 500 members in the aggregate, with 10 of the 16 Zacks sectors suffering margin contraction. On the flip side, four sectors enjoyed higher margins relative to the year-earlier period, led by the Energy sector.
Sectors suffering the biggest margin squeeze include Technology, Basic Materials and Finance. We discussed last week the earnings outlook for the Technology sector, particularly what we call the ‘Big 5 Tech Players’ – Apple, Amazon, Alphabet, Microsoft and Meta. For reference, please read – Making Sense of Big Tech Earnings After Amazon and Meta Tumble.
We pointed out in that note how each of these Tech leaders was in a mad rush over the last few year-plus to add employees, which has left them with bloated payroll expenses. The issue is particularly acute with Meta and Amazon, whose net margins this year are expected to be 1274 basis points and 586 basis points, respectively below the 2021 level.
The margin issue is hardly restricted to the ‘Big 5 Tech Players,’ as the issue is very much present with the broader Tech sector.
Third, the narrative that earnings estimates remain too high is misleading if not altogether wrong Regular readers of our earnings commentary know that we have consistently flagged the persistent cuts to forward earnings estimates over the last few months.
We take earnings estimate revisions very seriously as they form the core of our stock rating system. The way we see it, earnings estimates for 2023 outside of the Energy sector peaked in April and have been steadily trending down since then.
Since mid-April, 2023 earnings estimates in the aggregate have come down by -7.4% for the S&P 500 index as a whole and -10.4% on an ex-Energy basis. The cuts to estimates have been particularly notable for the Tech (down -17.4% since mid-April), Construction (-21.5%), Retail (-18.2%), Industrial Products (-11.8%), Consumer Discretionary (-15.1%) and Aerospace (-11.5%).
If we look at Amazon and Meta, 2023 earnings estimates for Amazon have come down -19.8% for Amazon (from $21.7 per share to $1.74 per share) and -30.4% for Meta (from $11.15 per share to $7.76 per share) over the last 3 months.
This goes to our earlier comment about the revisions narrative being misleading if not altogether wrong. Estimates have been coming down for a while now and are down more than -10% for 2023 on an ex-Energy basis since mid-April, as we stated earlier.
There are some in the market who think that 2023 earnings should be below the 2022 level instead of the current expected +3.5% growth simply because the U.S. economy is expected to go through a moderate recession.
I am not suggesting that 2023 earnings can’t be below the 2022 level; they can be, and current revisions trends are likely headed there. But it is wrong to expect moderate declines in ‘real’ GDP to automatically result in ‘nominal’ or non-inflation adjusted corporate earnings to also decline. Corporate revenues and earnings are ‘nominal’ values and will reflect the effects of inflation. Inflation is expected to come down in 2023, but nevertheless remain positive.Q3 Earnings Season Scorecard
Including all of the results through Friday, November 4th, we now have Q3 results from 429 S&P 500 members that combined account for 85.8% of the index’s total membership.
The bulk of the Q3 earnings season for the large-cap companies in the S&P 500 index is now behind us. But there are still a ton of small and mid-cap companies that have yet to report quarterly results. This week will bring in results from more than 1,000 companies, including 30 S&P 500 members.
For the 429 index members that have reported results already, total earnings are up +2.2% from the same period last year on +12.4% higher revenues, with 70.9% beating EPS estimates and 67.8% beating revenue estimates.
Here is how the 2022 Q3 earnings and revenue growth rates for these 429 companies compares across different periods.
The EPS and revenue beats percentages were notably on the weak side earlier in the reporting cycle. But as you can see above, they are very much within the historical range by now.
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>Breaking Down the Earnings Picture as Estimates Fade
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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/performance for information about the performance numbers displayed in this press release.