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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 are off to a good-enough start to the 2022 Q4 season, with no signs yet of an impending earnings cliff that will prompt management teams to overwhelmingly guide lower. That said, companies appear to be struggling to beat consensus estimates, suggesting that estimates likely hadn’t fallen enough.
Looking at 2022 Q4 as a whole, aggregate S&P 500 earnings are currently expected to be down -7.2% on +4.0% higher revenues. Excluding the Energy sector’s strong contribution, Q4 earnings for the rest of the index are expected to be down -11.3% on +3.1% higher revenues.
For 2023 Q1, S&P 500 earnings are currently expected to be down -4.2% on +2.8% higher revenues. This is down from -4% on January 6th and -2.9% in mid-December 2022.
Earnings estimates for full-year 2023 have been coming down as well. From their peak in mid-April 2022, the aggregate total for the year has been cut by -10% for the index as a whole and -12.2% excluding the Energy sector’s contribution.
We are off to a good-enough start to the Q4 earnings season, with very strong net interest earnings at the banks helping offset the expected weakness in investment banking.
Net interest income was up +48% at JPMorgan ((JPM - Free Report) ), though management commentary suggested that this profitability source may have peaked. The same at Bank of America ((BAC - Free Report) ) and Wells Fargo ((WFC - Free Report) ) was up +29% and +45%, respectively.
The unflattering year-over-year profitability comparisons for each of these companies – JPMorgan’s earnings increased +5.9%, Bank of America’s increased by +1.7% while Citigroup and Wells Fargo suffered declines of -43.3% and -50.2%, respectively - are primarily a function of differences in how reserves or provision for loan losses behaved in the two periods.
All of these banks booked reserves for loan losses given the coming economic weakness while they were releasing previously booked reserves in the year-earlier period.
Looking beyond these early Q4 results, we continue to see the big question surrounding this earnings season to be not so much about earnings growth for the quarter or what proportion of the S&P 500 members will end up beating consensus estimates, but rather what these results and the associated management commentary and guidance will tell us about the evolving earnings outlook for 2023.
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 chart below shows the evolution of aggregate earnings estimates for 2023 since the start of 2022.
Image Source: Zacks Investment Research
As noted earlier, the current aggregate earnings total for the index approximates to an index ‘EPS’ level of $220.56, 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
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 +1.7%. 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.
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A Good Enough Start to the Q4 Earnings Season
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 are off to a good-enough start to the Q4 earnings season, with very strong net interest earnings at the banks helping offset the expected weakness in investment banking.
Net interest income was up +48% at JPMorgan ((JPM - Free Report) ), though management commentary suggested that this profitability source may have peaked. The same at Bank of America ((BAC - Free Report) ) and Wells Fargo ((WFC - Free Report) ) was up +29% and +45%, respectively.
The unflattering year-over-year profitability comparisons for each of these companies – JPMorgan’s earnings increased +5.9%, Bank of America’s increased by +1.7% while Citigroup and Wells Fargo suffered declines of -43.3% and -50.2%, respectively - are primarily a function of differences in how reserves or provision for loan losses behaved in the two periods.
All of these banks booked reserves for loan losses given the coming economic weakness while they were releasing previously booked reserves in the year-earlier period.
Looking beyond these early Q4 results, we continue to see the big question surrounding this earnings season to be not so much about earnings growth for the quarter or what proportion of the S&P 500 members will end up beating consensus estimates, but rather what these results and the associated management commentary and guidance will tell us about the evolving earnings outlook for 2023.
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 chart below shows the evolution of aggregate earnings estimates for 2023 since the start of 2022.
Image Source: Zacks Investment Research
As noted earlier, the current aggregate earnings total for the index approximates to an index ‘EPS’ level of $220.56, 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
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 +1.7%. 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.