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Zacks Earnings Trends Highlights: Microsoft, Intel, Advanced Micro Devices

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For Immediate Release

Chicago, IL – February 2, 2023 – Zacks Director of Research Sheraz Mian says:

A Steady Earnings Picture, Without a 'Cliff' In Sight

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:

  • For the 191 S&P 500 companies that have reported Q4 results, total earnings are up +1.5% from the same period last year on +7.2% higher revenues, with 72.3% beating EPS estimates and 67.5% beating revenue estimates.
  • The proportion of these 191 index members beating both EPS and revenue estimates at 53.4% compares to the average for the preceding 20 quarters of 60.1% (the range is a high of 81.7% and low of 46.6%).
  • Looking at 2022 Q4 as a whole, aggregate S&P 500 earnings are currently expected to be down -6.4% on +4.7% higher revenues. Excluding the Energy sector’s strong contribution, Q4 earnings for the rest of the index are expected to be down -10.4% on +3.7% higher revenues.
  • For 2023 Q1, S&P 500 earnings are currently expected to be down -7.2% on +2.5% higher revenues. This is down from -4% on January 6th and -2.9% in mid-December 2022.
  • Looking at the calendar-year picture, total S&P 500 earnings are on track to be up +4.2% in 2022 and expected to decrease -0.2% in 2023. On an ex-Energy basis, total 2022 index earnings would be down -2.6% (instead of +4.2%, with Energy) while 2023 earnings would be up +1.7% (instead of down -0.2%).

The Q4 earnings season continues to show that while growth is moderating and decelerating, it isn’t falling off the cliff that many appeared to fear could be in store for us.

We earlier cited the example of Microsoft (MSFT - Free Report) where cyclical forces appeared to be starting to weigh on the growth trajectory of its cloud business. A number of other cloud players have since confirmed those emerging spending trends from business customers.

This is a logical extension of the cumulative effects of Fed’s extraordinary monetary policy since March 2022 that many in the market hope is getting close to the finish line.

Businesses and households are starting to rein in their spending plans and a number of high-profile companies have announced major layoffs. The labor market still remains strong, helping support households’ purchasing power. But the overall operating landscape has become difficult for all companies. This puts a premium on management’s abilities to execute in a tough environment.

Beyond the Fed’s role in the macroeconomic slowdown is the post-Covid adjustment in a number of important slices of the economy. One such example of ongoing adjustments is in the semiconductor space where companies struggled to meet surging demand over the last two years and are now faced over-supplied markets.

Intel (INTC - Free Report) is faced with a host of company-specific issues, but the unfavorable supply-demand fundamentals of the chip space isn’t helping its broader turnaround efforts. The market gave a thumbs down to the Intel release but appreciated Advanced Micro Devices’ (AMD - Free Report) effort, though both are faced with the same market fundamentals, broadly speaking.

The bigger point here isn’t to pick on Intel or give undue credit to AMD, but rather to point out the macro forces weighing on growth. It is post-Covid adjustment for Intel, AMD and a host of other companies in different industries on top of cyclical forces resulting from tighter financial conditions.

As noted in this space before, GDP growth estimates for the current and coming quarters have been steadily coming down, with full-year 2023 GDP growth now barely in positive territory.

We have been pointing out for a while now how estimates for this year have been steadily coming down for months now, in anticipation of this macroeconomic development.

As noted earlier, the current aggregate earnings total for the index approximates to an index ‘EPS’ level of $216.07, down from $242.98 in mid-April, 2022.

The Overall Earnings Picture

Earnings next year are now expected to be down -0.2%. This 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 -14% since mid-April 2022. Perhaps we see a bit more downward adjustments to estimates over the coming weeks, after more companies report Q4 results and provide guidance along the lines of what we saw with Microsoft. 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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