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 Q2 earnings season is one of continued resilience and strength, with an above-average proportion of companies not only beating estimates but also providing reassuring guidance for the coming periods.
For the 452 S&P 500 companies that have reported Q2 results, total earnings are down -9.6% from the same period last year on +0.4% higher revenues, with 78.8% beating EPS estimates and 65.0% beating revenue estimates.
For the Tech sector, we now have Q2 results for 81.0% of the sector’s total market capitalization in the index. Total earnings for these companies are down -2.4% on -0.2% lower revenues, with 81.7% beating EPS estimates and 80.0% beating revenue estimates.
For 2023 Q3, S&P 500 earnings are currently expected to be down -2.2% on +0.3% higher revenues. Excluding the Energy sector, Q3 earnings for the rest of the index would be up +3.3% on +3.0% higher revenues.
For 2023 Q2, S&P 500 earnings are on track to decline -8.2% from the same period last year on +0.8% higher revenues. This would follow the -3.4% decline in index earnings in the preceding period (2023 Q1) and the -5.4% decline in the last quarter of 2022.
In other words, 2023 Q2 is expected to be the third consecutive quarter of declining S&P 500 earnings. The expectation currently is for another earnings decline in Q3 of -2.2%, after which growth turns positive in Q4 and continues in 2024. In fact, Q3 earnings would be positive had it not been for the Energy sector drag.
Image Source: Zacks Investment Research
As you can see from these quarterly earnings-growth expectations, the long-feared recession doesn’t show up in this near-term earnings outlook. A big-picture view of corporate profitability on a long-term basis doesn’t leave much room for a recession either, as you can see in the chart below.
Image Source: Zacks Investment Research
These growth expectations reflect current bottom-up consensus earnings estimates for the individual S&P 500 companies that, in turn, are based on the estimates from individual sell-side analysts that cover those companies.
Predicting recessions is beyond the core competence of equity research analysts. But they do keep a close eye on the evolving business trends for the companies and industries they follow. Analysts maintain elaborate financial models for the companies in their coverage, which allows them to come up with their earnings, revenues, and other estimates.
We at Zacks make it our business to closely monitor how analysts’ earnings estimates evolve over time. In fact, our rating system, the Zacks Rank, is based on earnings estimate revisions.
Regular readers of our earnings commentary know that we have flagged a notable stabilization in the estimate revisions trend since the start of 2023 Q2, reversing the persistently negative trend that had been in place for almost a year prior.
Earnings estimates in the aggregate for the S&P 500 index have come down only a touch since the start of April, with a number of key sectors starting to see modest positive estimate revisions. These sectors include Construction, Industrial Products, Autos, Tech, Medical, and Retail.
You can see this in how estimates for the current period (2023 Q3) have been evolving in recent days for some of this year’s market leaders like Amazon AMZN, Meta Platforms META, Alphabet GOOGL, and others.
Meta is currently expected to bring in $3.44 per share in earnings in Q3 on $33.45 billion in revenues, representing year-over-year growth rates of +109.8% and +20.7%, respectively. Please note that the $3.44 per share Q3 estimate for Meta has risen +16.6% over the past month.
The current Q3 estimate for Amazon has literally been shooting higher, with the current estimate up +43.6% over the past month. The same for Alphabet has risen by +7.5% over the same time period.
Hard to tell at this stage if the revisions trend will remain on its recent positive trajectory or revert back to its original negative trend. But it is nevertheless a market-friendly development.
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