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Making Sense of the Earnings Picture and Estimate Revisions
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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:
We continue to see the picture that emerged from the 2022 Q3 earnings season running counter to pre-season fears of an impending earnings cliff. Overall corporate profitability isn’t great, but it isn’t bad either. That said, estimates for the coming periods are steadily coming down, with the revisions trend accelerating in recent days.
For the 453 S&P 500 members that have reported Q3 results already, total earnings are up +2.6% from the same period last year on +12.4% higher revenues, with 69.3% beating EPS estimates and 68.0% beating revenue estimates.
Looking at 2022 Q3 as a whole, total S&P 500 earnings are currently expected to be up +1.5% from the same period last year on +11.4% higher revenues. Excluding contributions from the Energy sector, Q3 earnings for the rest of the index would be -6.0% below the year-earlier level.
Looking at the calendar-year picture, total S&P 500 earnings are expected to be up +5.0% in 2022 and +3.5% in 2023. On an ex-Energy basis, total 2022 index earnings would be down -1.8% (instead of +5.0%, with Energy).
The overall earnings picture has proved to be a lot more stable and resilient than many were willing to give it credit for before the start of the Q3 earnings season that’s now entering its final phase.
As we have consistently been stating, corporate earnings aren’t great, but they aren’t bad either. Many in the market feared an earnings cliff that would force management teams to provide downbeat guidance.
We got some of those downbeat reports, with Disney (DIS - Free Report) and Take-Two Interactive (TTWO - Free Report) as notable such examples from this week’s docket. But we also had DuPont (DD - Free Report) , Viatris (VTRS - Free Report) and many others that left the market impressed.
Not much growth was expected given where we are in the economic cycle. But the actual growth coming through the results is ever so slightly better than expected. It is this performance relative to expectations rather than the absolute level of earnings or the growth pace that is of relevance to the market.
Looking at those expectations for 2022 Q4 and beyond, they are getting reset lower, as we have been pointing out for a while now.
Analysts have been steadily cutting their estimates for some time. We saw this in the run up to the start of the Q3 earnings season and the trend continues with respect to estimates for the current period (2022 Q4) and full-year 2023.
The charts below show how earnings growth expectations for the 2022 Q4, as a whole and on an ex-Energy basis, have evolved in recent weeks.
Image Source: Zacks Investment Research
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 we have consistently been pointing out, aggregate S&P 500 earnings outside of the Energy sector peaked in mid-April and have been steadily trending down ever since.
In fact, S&P 500 earnings estimates in the aggregate outside of the Energy sector have declined -10.8% since mid-April, with double-digit percentage declines in Retail, Construction, Consumer Discretionary, Tech, Industrial Products and the Aerospace sectors. On the whole, estimates are down for 13 of the 16 Zacks sectors.
The Overall Earnings Picture
The chart below that provides a big-picture view of earnings on a quarterly basis. The growth rate for Q3 is on a blended basis, where the actual reports that have come out are combined with estimates for the still-to-come companies.
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
As you can see above, earnings next year are expected to be up only +3.5%. 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 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 by more than tenth 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.
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Making Sense of the Earnings Picture and Estimate Revisions
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 overall earnings picture has proved to be a lot more stable and resilient than many were willing to give it credit for before the start of the Q3 earnings season that’s now entering its final phase.
As we have consistently been stating, corporate earnings aren’t great, but they aren’t bad either. Many in the market feared an earnings cliff that would force management teams to provide downbeat guidance.
We got some of those downbeat reports, with Disney (DIS - Free Report) and Take-Two Interactive (TTWO - Free Report) as notable such examples from this week’s docket. But we also had DuPont (DD - Free Report) , Viatris (VTRS - Free Report) and many others that left the market impressed.
Not much growth was expected given where we are in the economic cycle. But the actual growth coming through the results is ever so slightly better than expected. It is this performance relative to expectations rather than the absolute level of earnings or the growth pace that is of relevance to the market.
Looking at those expectations for 2022 Q4 and beyond, they are getting reset lower, as we have been pointing out for a while now.
Analysts have been steadily cutting their estimates for some time. We saw this in the run up to the start of the Q3 earnings season and the trend continues with respect to estimates for the current period (2022 Q4) and full-year 2023.
The charts below show how earnings growth expectations for the 2022 Q4, as a whole and on an ex-Energy basis, have evolved in recent weeks.
Image Source: Zacks Investment Research
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 we have consistently been pointing out, aggregate S&P 500 earnings outside of the Energy sector peaked in mid-April and have been steadily trending down ever since.
In fact, S&P 500 earnings estimates in the aggregate outside of the Energy sector have declined -10.8% since mid-April, with double-digit percentage declines in Retail, Construction, Consumer Discretionary, Tech, Industrial Products and the Aerospace sectors. On the whole, estimates are down for 13 of the 16 Zacks sectors.
The Overall Earnings Picture
The chart below that provides a big-picture view of earnings on a quarterly basis. The growth rate for Q3 is on a blended basis, where the actual reports that have come out are combined with estimates for the still-to-come companies.
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
As you can see above, earnings next year are expected to be up only +3.5%. 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 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 by more than tenth 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.