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Zacks Earnings Trends Highlights: Bank of America, United Airlines, J. B. Hunt, Pepsi and General Mills

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For Immediate Release

Chicago, IL – October 20, 2022 – Zacks Director of Research Sheraz Mian says, "With respect to positive surprises, the percentage of these 62 index members beating EPS estimates is below the 5-year average, but otherwise within the historical range."

Earnings Picture: Good Enough, So Far

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 picture emerging from the 2022 Q3 earnings season belies pre-season fears of an impending earnings cliff. The overall corporate profitability picture isn’t great, but it isn’t bad either.
  • For the 62 S&P 500 members that have reported Q3 results already, total earnings are down -4.6% from the same period last year on +8.8% higher revenues, with 77.4% beating EPS estimates and 59.7% beating revenue estimates.
  • With respect to positive surprises, the percentage of these 62 index members beating EPS estimates is below the 5-year average, but otherwise within the historical range, though the revenue beats percentage is on the lower side.
  • Looking at 2022 Q3 as a whole, total S&P 500 earnings are currently expected to be up +0.6% 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 -6.0% below the year-earlier level.

The ongoing Q3 earnings season appears to be a replay of what we witnessed in the June-quarter reporting cycle, when estimates and sentiment had weakened so much that the actual results end up looking a lot better in comparison.

Having seen results from about 12% of S&P 500 members by now, we can see that results are by no means great, but they are not bad either. It is all about expectations and those had been adjusted lower ahead of the start of this earnings season. Importantly, many in the market appeared ready for earnings to ‘fall off the cliff’, with management teams guiding lower. We have seen some of that, but for the most part the long-feared development has not materialized, at least not yet.

It is important to point out that the sample of results at this stage is weighted towards the Finance sector, whose profitability benefits from higher interest rates. Bank of America (BAC - Free Report) really stood out on that count, but practically all of the banks came out with strong numbers for Q3 and provided reassuring commentary for Q4. There have been good numbers outside of Finance as well, with the early results from air carriers like United Airlines (UAL - Free Report) , truckers like J.B. Hunt (JBHT - Free Report) , beverage and food players like Pepsi (PEP - Free Report) and General Mills (GIS - Free Report) all showing strength.

We should keep in mind that these operators in the consumer-facing beverage, food and other product categories have been able to pass on the higher cost of inputs, labor, and logistics thus far. But we can intuitively appreciate that the trend cannot go on forever.

The cost headwinds have been with us for a while, as has been the issue of foreign-exchange translation issues. But the U.S. dollar’s record strength this year has become a much bigger hurdle for companies. In fact, P&G was forced to trim its guidance solely on FX grounds.

All of this collectively is weighing on estimates for the current and coming periods, as we have been pointing out in this space. 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.

Aggregate S&P 500 earnings outside of the Energy sector have declined -7.7% 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 Transportation sectors as well.

The Overall Earnings Picture

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 +141.9%. Excluding this extraordinary Energy sector contribution, earnings growth for the rest of the index would be down -0.3%. This relatively flat earnings picture for this year is also in-line with the economic ground reality.

Earnings next year are expected to be up +5.6% as a whole and +7.2% 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 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 -7.7% 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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