Note: The following is an excerpt from this week’s report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, Earnings Trends please click here>>> Here are the key points:
The early 2022 Q3 results don’t inspire a lot of confidence about the overall earnings picture. At this admittedly early stage, companies appear to be struggling to beat consensus estimates that had already come down significantly.
For the 21 S&P 500 members that have reported Q3 results already, EPS and revenue beats percentages are tracking the lowest levels in the preceding 20 reporting cycles (5 years).
Looking at 2022 Q3 as a whole, total S&P 500 earnings are currently expected to be up +0.1% from the same period last year on +9.1% higher revenues. Excluding contributions from the Energy sector, Q3 earnings for the rest of the index would be -6.8% below the year-earlier level.
We are off to a rough start in the early Q3 results that have been coming out. All of these early reports have been from companies reporting results for their fiscal quarters ending in August, which we count as part of our September-quarter tally. We have seen such Q3 results from 21 S&P 500 members already. Our comment about the ‘rough start’ that these results isn’t just about the disappointing results from the likes of FedEx ( FDX Quick Quote FDX - Free Report) , Nike ( NKE Quick Quote NKE - Free Report) , Carnival ( CCL Quick Quote CCL - Free Report) and others, but rather how so few of these companies have been able to beat estimates that had already come down significantly. The proportion of these 21 index members beating EPS and revenue estimates is the lowest in the last 5 years. It is premature to read too much into these early results. But it does appear that the market’s anxieties about corporate profitability may be coming to fruition this earnings season. The flip side of this argument is that if results turn out to be less bad than what reports from FedEx, Carnival and others suggest, then the market will be relieved and we may see a replay of what we saw in the Q2 earnings season when results weren’t great, but they weren’t bad either. 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. As we have been pointing out here, estimates have been coming down, with the overall revisions trend remaining negative even after accounting for the persistent favorable trend enjoyed by the Energy sector. We see this trend of negative estimate revisions at play with the next few quarters as well as with full-year 2023 estimates. The chart below shows how the expected aggregate total earnings for full-year 2023 have evolved on an ex-Energy basis. Image Source: Zacks Investment Research As you can see above, aggregate S&P 500 earnings outside of the Energy sector have declined -6.9% since mid-April, with double-digit percentage declines in Retail, Construction, Consumer Discretionary, and Tech. Estimates have been coming down in the Industrial Products, Medical and Finance sectors as well. The Overall Earnings Picture The chart below provides a big-picture view of earnings on a quarterly basis. Image Source: Zacks Investment Research The chart below shows the overall earnings picture on an annual basis, with the growth momentum expected to continue. Image Source: Zacks Investment Research 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 +141.0% this year. Excluding this extraordinary Energy sector contribution, earnings growth for the rest of the index would be down -0.1%. This flat earnings picture for this year is also in-line with the economic ground reality. Earnings next year are expected to be up +6.1% as a whole and +7.9% 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 -6.9% since mid-April. Perhaps we see a bit more downward adjustments 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 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.