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Previewing the Q3 Earnings Season as Estimates Slide

·4 min read

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:

 

  • Estimates for the last two quarters of this year and full-year 2023 are coming down, even though positive revisions to the Energy sector continue to partly offset those estimate cuts elsewhere.

  • The +1.4% earnings growth expected for the S&P 500 index in 2022 Q3 is down from +7.2% at the start of the period. Excluding the Energy sector, Q3 earnings are expected to be down -5.3% at present, a significant decline from +2.1% at the beginning of July.

  • Q3 estimates have been cut for 14 of the 16 Zacks sectors since the quarter got underway, with the biggest declines at the Consumer Discretionary, Consumer Staples, Technology, Retail and Conglomerates sectors.

  • On the positive side, Q3 estimates have gone up the most for the Energy sector, but the revisions trend has been positive for the Auto sector as well.

The Q3 earnings season will really get going in mid-October when JPMorgan JPM and the other big banks come out with their results. But the early reports will start trickling in soon enough, with next week’s Oracle ORCL report for the company’s fiscal period ending in August getting counted as one such early Q3 report.

We will have Costco COST, FedEx FDX and others come out with similar early Q3 results before we see JPMorgan’s quarterly numbers.

The preceding earnings season turned out to be better than expected; not great, but not bad either. Given the unprecedented Fed tightening and the resulting macro uncertainties, market participants feared the corporate profitability picture would start deteriorating.

We saw some companies miss estimates and guide lower. But for the most part, the market’s earnings fears didn’t bear out. That said, the strong U.S. dollar has joined the pre-existing headwinds of logistical challenges and inflationary pressures in weighing on corporate profitability. We will have to wait and see whether the Q3 reporting cycle will bring in the long-feared earnings downturn.

Estimates have started coming down, with the overall revisions trend turning negative even after accounting for the persistent favorable revisions trend enjoyed by the Energy sector.

You can see this in the revisions trend to Q3 estimates in the chart below.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

If we look at the evolution of Q3 earnings growth expectations on an ex-Energy basis, the expected growth rate has dropped from +2.1% on July 6th to -5.3% today.

The chart below shows how the expected aggregate total earnings for full-year 2023 have evolved on an ex-Energy basis.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

As you can see above, aggregate S&P 500 earnings outside of the Energy sector have declined -6% since mid-April, with double-digit percentage declines in Retail (down -14.7%), Construction (-10.7%), and Tech (-10.8%). Estimates have also been coming down in the Consumer Discretionary, Industrial Products, Medical and Finance sectors as well.

The Overall Earnings Picture

Beyond Q2, the growth picture is expected to modestly improve, as you can see in the chart below that provides a big-picture view of earnings on a quarterly basis.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

The chart below shows the overall earnings picture on an annual basis, with the growth momentum expected to continue.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Please note that a big part of this year’s growth is thanks to the strong momentum in the Energy sector whose earnings are on track to grow +138.2% this year. Excluding this extraordinary Energy sector contribution, earnings growth for the rest of the index would be up only +0.2%.

There is a rising degree of uncertainty about the outlook, reflecting a lack of macroeconomic visibility in a backdrop of Fed monetary policy tightening. The evolving earnings revisions trend will reflect this macro backdrop.


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