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:
Many in the market consider current earnings expectations to be too high and fear that the Q4 earnings season will cause estimates to be significantly lowered.
For 2022 Q4, aggregate S&P 500 earnings are currently expected to be down -7.3% on +4.0% higher revenues. The -7.3% earnings decline today is down from +1.7% on October 5th.
Excluding the Energy sector’s strong contribution from the S&P 500 index, Q4 earnings for the rest of the index are expected to be down -11.4% on +3.1% higher revenues. The -11.4% decline in index earnings decline today is down from -2.9% on October 5th.
Full year 2023 earnings estimates have been coming down after peaking in mid-April, with the aggregate total down -9.5% from the peak for the index as a whole and -11.9% excluding the Energy sector’s contribution.
We strongly dispute the notion that earnings estimates remain out of sync with the economic ground reality, particularly if the economic slowdown resulting from the Fed’s extraordinary tightening turns out to be moderate. The big question that the 2022 Q4 earnings season, which gets underway in the coming days, is not so much about earnings growth for the quarter or what proportion of the S&P 500 members end up beating consensus estimates, but rather what these results and the associated management commentary and guidance for the coming periods tell us about the evolving earnings outlook. The fear in the market is that we may be on the cusp of an earnings cliff, with the combined effects of softening demand resulting from the extraordinary Fed tightening and persistent cost pressures prompting management teams across many industries to provide downbeat guidance. Keep in mind that it isn’t a new fear; we had something similar in place ahead of the start of the preceding reporting cycle (2022 Q3) as well, though the fear appears to be somewhat more widely held this time around. Related to this fear is the view that current earnings estimates remain elevated and need to get cut significantly to get in-sync with the unfolding economic ground reality. We don’t agree with this view, but see this picture unfolding only in the backdrop of the U.S. economy heading towards a ‘hard landing’. We see the risk of such a ‘hard landing’ as increasing if the Fed persists in its tightening policy beyond what the market has already priced in. But a hard-landing for the U.S. economy isn’t our base case, which makes us a lot more sanguine in our earnings outlook given how much estimates have come down already. The four largest banks - JPMorgan ( JPM Quick Quote JPM - Free Report) , Bank of America ( BAC Quick Quote BAC - Free Report) , Citigroup ( C Quick Quote C - Free Report) and Wells Fargo ( WFC Quick Quote WFC - Free Report) – that are deck to kick-off the Q4 reporting cycle for the Finance sector have been net beneficiaries of higher interest rates through improved margins. But most of them have suffered some estimate cuts, though significantly smaller than what companies in the Tech, Consumer Discretionary and Construction sectors have already endured. For example, Citigroup’s current Zacks Consensus EPS of $1.21 for Q4 has declined -8.3% over the past two months while the same for Wells Fargo has been cut by a far more dramatic -50% over the past month. Even JPMorgan and Bank of America have endured modest cuts to estimates. Estimates have come down a lot more notably in a broad swath of industries relative to what we noted for the four big banks. You can see this in the revisions chart below that show how earnings growth expectations for the 2022 Q4, as a whole and on an ex-Energy basis, have since the quarter got underway. Image Source: Zacks Investment Research Estimates have come down significantly for full-year 2023 as well, with the chart below showing the evolution of aggregate earnings. Image Source: Zacks Investment Research As noted earlier, the current aggregate earnings total for the index approximates to an index ‘EPS’ level of $221.88, down from $242.98 in mid-April, 2022. The chart below tracks these index ‘EPS’ values since the start of 2022. Please note that these ‘EPS’ values are imputed approximations and have been previously published on the dates listed in the chart below. Image Source: Zacks Investment Research Estimates for the Energy sector have started coming down lately as well. But for a long stretch last year, they were steadily going up. The 2023 negative revisions trend becomes even more pronounced on an ex-Energy basis, as the chart below shows. Image Source: Zacks Investment Research The Overall Earnings Picture The chart below provides a big-picture view of earnings on a quarterly basis. The growth rate for Q4 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 +2.2%. 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 almost -12% since mid-April. Perhaps we see a bit more downward adjustments to estimates over the coming weeks, after the Q4 reporting cycle really gets underway. 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.