The Q3 Earnings Season Gets Underway

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Rising treasury bond yields have become a major headwind for stocks. This issue took center stage following the latest Fed dot plot that appeared to push back the starting point of the central bank’s eventual unwinding of its monetary policy tightening. 

As we have noted here before, we see the seemingly hawkish Fed posture as nothing more than an insurance policy for the central bank that will come in handy should the recent favorable momentum on the inflation front start stalling.

It is prudent on the Fed’s part to have complete confidence in the inflation question before changing course, though we remain of the view that the enduring trend on the inflation front remains favorable even as the macroeconomic backdrop remains far more resilient relative to earlier expectations.

The economy’s resilience has been showing up in the positive turn in the earnings outlook that we have been flagging in recent months. Specifically, the earnings estimate revisions trend notably stabilized in early April this year after steadily coming down for almost a year.

Had it not been for the Energy sector weakness, whose estimates had been steadily coming down this year before reversing course in recent days and going back up, aggregate earnings estimates would have been modestly up since early April 2023.

Sectors enjoying positive estimate revisions in this time period include Tech, Construction, Autos, Consumer Discretionary, Industrial Products, and Retail.

We are seeing a similar revisions trend at play concerning estimates for 2023 Q3, whose advanced results have started coming out already.

The expectation currently is of S&P 500 earnings declining by -1.9% in Q3 from the same period last year on +0.9% higher revenues. This would follow the -7.1% decline on +1.1% higher revenues in 2023 Q2.

The chart below highlights the year-over-year Q3 earnings and revenue growth in the context of where growth has been in recent quarters and what is expected in the next few periods.

Zacks Investment Research

Image Source: Zacks Investment Research

As you can see here, 2023 Q3 is expected to be the last period of declining earnings for the index, with positive growth resuming from 2023 Q4 onwards. In fact, had it not been for the Energy sector drag, earnings growth in 2023 Q3 would already be positive.

You can see this in the chart below which shows the index’s year-over-year earnings growth on an ex-Energy basis.

Zacks Investment Research

Image Source: Zacks Investment Research

The chart below shows the year-over-year change in net margins, with Q3 currently expected to be the 7th quarter in a row of declining margins.

Zacks Investment Research

Image Source: Zacks Investment Research

Excluding the Energy sector, however, net margins would be modestly up from the year-earlier period.

One sector that has made significant progress on the margins front is the Tech sector, whose year-over-year comparison turned positive in the preceding period and is expected to expand further this quarter, as the chart below shows.

Zacks Investment Research

Image Source: Zacks Investment Research

The chart below shows the earnings and revenue growth picture on an annual basis.

Zacks Investment Research

Image Source: Zacks Investment Research

Look at current expectations for next year and the year after to understand the disconnect between the reality of current bottom-up aggregate earnings estimates and the seemingly never-ending worries about an impending economic downturn. That said, most economic analysts have been steadily lowering their recessionary odds in recent months.
 

This Week’s Notable Earnings Releases

The Q3 earnings season will really get going when the big banks start coming out with their quarterly numbers in mid-October. But the reporting cycle has actually gotten underway already, with results from 16 S&P 500 members out as of Friday, September 29th.

These 16 S&P 500 members include bellwethers like Nike (NKE - Free Report), FedEx (FDX - Free Report), Adobe (ADBE - Free Report) and others. We have another 4 S&P 500 members on deck to report results this week, including Constellation Brands (STZ - Free Report), ConAgra (CAG - Free Report), and others.

FedEx, Adobe, Nike, and all of these other early reporters are coming out with their fiscal August-quarter results, which we and other research organizations count as part of the Q3 tally. We will have seen roughly two dozen such August-quarter results by the time JPMorgan comes out with its quarterly results on October 13th.

For the 16 S&P 500 members that have reported already, total earnings and revenues are up +0.7% and +4.5% from the same period last year, with 87.5% beating EPS estimates and 75% beating revenue estimates.

The comparison charts below put the Q3 earnings and revenue growth rates at this very stage in a historical context.

Zacks Investment Research

Image Source: Zacks Investment Research

The comparison charts below put the Q3 EPS and revenue beats percentages in a historical context.

Zacks Investment Research

Image Source: Zacks Investment Research


More By This Author:

Analyzing The Fed & Current Earnings Expectations
Previewing The Q3 Earnings Season
Looking Ahead To Q3 Earnings

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