For much of 2023, some of the biggest Wall Street bears were betting - quite vocally in certain prominent cases- that Q1 earnings season would finally be the nail in the coffin of the bear market rally. However, with consensus expectations tumbling into the earnings print (as they always do), the bogey to beat ended up being quite easy and as a result, Q1 2023 earnings season has proven to be much better than feared.

With 90% of S&P companies reporting results, here is where we stand:

• S&P 500 profits fell by 3% year/year, stronger than consensus estimates of a 7% decline at the start of reporting season.  In Europe, earnings actually rose by 3% y/y which is a positive surprise factor of 10% vs IBES estimates.

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• At a sector level, delivery has been mixed. In the US, Energy, Industrials and Discretionary are recording double-digit EPS growth, while 7 of the remaining sectors are coming in flat or down on a yoy basis. Financials EPS grew by +5% year/year. In Europe, Discretionary, Staples, Financials and Tech have fared better, while Energy, Materials and Communication Services are down double-digit.

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• Excluding Energy, S&P 500 year/year EPS growth troughed in 4Q 2022... and Goldman - unlike Morgan Stanley - believes that the worst of the 2023 negative earnings revision cycle is now behind us, to wit: "The earnings backdrop is showing green shoots of improvement. Excluding Energy, S&P 500 year/year EPS growth improved sequentially from -6% in 4Q 2022 to -5% in 1Q 2023."

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• Revenues grew by 4% in both the US and Europe, above expectations for growth of 3% and 1%, respectively. The proportion of companies beating estimates has picked up in both the US and Europe.

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• Net margins contracted by 99bps, the 3rd consecutive quarter of year/year margin decline, but by less than the 146bps expected. Margins in every sector surprised to the upside, led by Materials and Info Tech.
  • Still, if there was one recurring theme across earnings season it is this: as JPM notes, profit margins are showing increasing signs of a rollover, with Q1 EPS growth minus sales growth the weakest in a while (even if not as bad as initially expected).

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• The aggregate S&P 500 EPS surprise of 5% was in line with the historical median after being below average for most of 2022. The stock price reaction to beats has been rather subdued, though, where stocks that are beating estimates are, on average, outperforming by less than typical. On the other side, those that are missing estimates are being penalized by more than their historical median.

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