Q2 Results Likely To Reflect A Stabilizing Earnings Picture
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For 2023 Q2, S&P 500 earnings are expected to decline -9.8% from the same period last year on -0.4% lower 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 of another earnings decline in Q3 of -1.9%, after which growth turns positive in Q4 and continues in 2024.
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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.
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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 typical 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 several sectors starting to see modest positive estimate revisions. These sectors include Construction, Industrial Products, Autos, Tech, Medical, and Retail.
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.
Sector Focus
The big banks dominate the early phase of each reporting cycle, and the Q2 earnings season will be no different, with JPMorgan (JPM - Free Report), Citigroup (C - Free Report), and Wells Fargo (WFC - Free Report) coming out with their June-quarter results before the market’s open this Friday, July 14th.
While Q2 estimates for Citigroup and Wells Fargo have come down, the same for JPMorgan have increased modestly. In terms of year-over-year change, Citigroup’s Q2 earnings are expected to be -40.4% below the year-earlier level on -1.7% lower revenues. JPMorgan’s Q2 earnings are expected to be +31% above the year-earlier level on +21.0% higher revenues, while the same for Wells Fargo are expected to be up +56.7% and +19.1% from the year-earlier level, respectively.
The Finance sector as a whole is expected to show +9.8% earnings growth in Q2 on +6.9% higher revenues, which would follow the +1.3% earnings growth on +11.5% higher revenues in 2023 Q1.
Within these banks, the core commercial and consumer banking franchises are expected to show improved profitability, partly offset by continued weakness in investment banking and tough comparisons for the trading businesses. Recent commentary from management teams suggests that reserve bookings should be modest in Q2, though commercial real estate exposure will be driving most of that activity.
The chart below shows the sector’s earnings picture on an annual basis.
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Finance sector stocks have been laggards this year, as the chart below shows.
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As you can see above, the sector tracked the broader market earlier in the year, but the emergence of the regional bank crisis in March has weighed on the group ever since. It will be interesting if the coming Q2 earnings reports will help the group close the performance gap to some extent.
More By This Author:
The Q2 Earnings Season Kicks Off
The Earnings Picture Refuses To Weaken
Q2 Earnings: What Can Investors Expect?
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