Decoding Recent Positive Earnings Estimate Revisions
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 Q1 earnings season continues to be one of resilience and stability, with companies not only beating estimates but also providing a good-enough outlook in an uncertain macro environment. This is helping the revision trend to turn positive lately after remaining negative for almost a year.
Through the morning session of May 17th, we have seen Q1 results from 462 S&P 500 members, or 92.4% of the index’s membership. Total Q1 earnings for these companies are down -4% on +4.4% higher revenues, with 77.7% beating EPS estimates and 74.7% beating revenue estimates.
Earnings estimates for full-year 2023 appear to have reversed course lately after consistently coming down for almost a year since the April 2022 peak.
Since the start of 2023 Q2, full-year 2023 earnings estimates have increased for 10 of the 16 Zacks sectors, with Construction, Industrials, Autos, Retail, and Tech enjoying favorable estimate revisions. Estimates have come down for the Energy, Basic Materials, Transportation, Conglomerates, and Aerospace sectors.
The earnings picture defied the skeptics again in the 2023 Q1 earnings season, with companies not only handily beating estimates but also providing reassuring enough guidance for the current coming quarters.
We are not suggesting that earnings are great because they are not. After all, earnings growth is on track to be negative for the second quarter in a row, with the trend of declining profits expected to continue in the current period.
That said, the fear of all-around downbeat guidance and management commentary still remains just that, a fear. As a result, we continue to elude the earnings cliff that the market bears have been telling us for a while.
Perhaps it’s only a question of time, with the day of reckoning only being deferred to the second half of the year. But for now, at least, we can feel relieved that the earnings picture is good enough.
There are so many examples of bellwether companies showing that while growth has come down and conditions remain challenging, they are still profitably operating. Consumers are still spending, though there are signs of weakness at the margin.
The Q1 earnings season appears to have caused stabilization in the earnings estimate revisions trend that was consistently negative for almost a year. In fact, since the start of 2023 Q2 in April, full-year 2023 earnings estimates in the aggregate have actually increased a bit, with estimates for 9 of the 16 Zacks sectors modestly up in that period.
The favorable reversal in the revisions trend is particularly notable for the Construction, Industrial Products, Retail, and Technology sectors. As we noted last week, you can see this in the revisions trend for a few bellwether players for these sectors, like KB Home KBH on the Construction side, Amazon AMZN for Retail, and Microsoft MSFT for the Tech sector.
For example, Amazon’s current Zacks Consensus EPS of $1.57 for 2023 is up from $1.34 on March 31st. KB Home is currently expected to bring $5.27 per share, which is up from $4.97 per share on March 31st. Similarly, the $9.65 per share Microsoft is expected to bring in this year today is up from $9.34 per share on March 31st.
It is important to note that while earnings estimates for KB Home, Amazon, and Microsoft have increased lately, they are still down significantly relative to what was expected a year ago. For example, Microsoft’s $9.65 per share estimate today is down from the $10.62 per share expected on May 31st, 2022. The 2023 EPS estimates for KB Home and Amazon are down -51.2% and -33.8% over the past year.
It is hard to know how enduring or otherwise this favorable recent turn in the revisions trend will be, but it is nevertheless a positive development.
The Earnings Big Picture
The chart below provides a big-picture view of earnings on a quarterly basis. The growth rate for Q1 is on a blended basis, where the actual reports that have come out are combined with estimates for the still-to-come companies.
Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on an annual basis.
Image Source: Zacks Investment Research
As we have pointed out all along, aggregate earnings estimates for 2023 peaked in April last year and consistently came down since then. Even accounting for the aforementioned positive revisions trend in recent weeks, aggregate 2023 earnings estimates have declined by -12.7% since the April 2022 peak and -14.2% on an ex-Energy basis.
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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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
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