Earnings estimates continue to fall

Note: The following is an excerpt from this week’s article. Earnings Trends report. You can access the complete report which contains actual historical and detailed estimates for the current and next periods, please click here>>>

Here are the key points:

  • The trend of negative estimate revisions that was already firmly in place before the start of the third quarter earnings season has since accelerated further, with estimates for the current and future periods declining significantly.
  • Earnings estimates for the full year 2023 have fallen after peaking in mid-April, with the aggregate total down -8.7% from peaks for the broader index and – 11.6% excluding the contribution from the energy sector.
  • For the current period (Q4 2022), total S&P 500 earnings are expected to be down -5.5% from the same period last year, with revenue up +4.3%. The expected pace of earnings growth is down, dropping from +1.7% at the start of October to +2.5% at the end of August.
  • Looking at the calendar year chart, total earnings for the S&P 500 are expected to be up +4.8% in 2022 and +2.8% in 2023. On a non-energy basis, total earnings of the 2022 index would be down -2.1% (instead of +4.8%, with Energy).

The overall picture that emerged from the third quarter earnings season is one of stability and resilience, although the trend of negative revisions has accelerated.

We’re not saying corporate earnings are great, but they’re not bad either. Many market participants feared a slump in earnings that would force management teams across many industries to provide pessimistic advice. Target TGT was one such operator with disappointing results. Many others were in the Walmart WMT camp and posted impressive results.

We didn’t expect a lot of growth given where we are in the economic cycle. But actual earnings growth was slightly better than expected. It is this performance relative to expectations rather than the absolute level of earnings or the pace of growth that matters to the market.

As for the expectations for the fourth quarter of 2022 and beyond, they are reset lower, as we have been highlighting for a while now. Analysts have been steadily lowering their estimates for some time. We have seen this as we approach the start of the Q3 earnings season and the trend continues when it comes to estimates for the current period (2022 Q4) and full year 2023.

The charts below show how earnings growth expectations for the fourth quarter of 2022, as a whole and excluding energy, have evolved over the past few weeks.

Image source: Zacks Investment Research

The graph below shows how the expected aggregate total profits for the whole of 2023 have evolved excluding energy.

Zacks Investment Research
Image source: Zacks Investment Research

As we have consistently pointed out, aggregate S&P 500 earnings outside of the energy sector peaked in mid-April and have been falling ever since.

The overall picture of earnings

The chart below gives an overview of earnings on a quarterly basis. The growth rate for the third quarter is on a blended basis, where actual reports that have come out are combined with estimates for companies yet to come.

Zacks Investment Research
Image source: Zacks Investment Research

The chart below presents the overall earnings picture on a yearly basis, with the growth momentum expected to continue.

Zacks Investment Research
Image source: Zacks Investment Research

As you can see above, earnings next year are only expected to increase by +2.8%. This magnitude of growth can hardly be called out of sync with a stable or even slightly declining economic growth outlook. Keep in mind that the overall GDP growth numbers are in real or inflation-adjusted terms while the S&P 500 earnings discussed here are not.

As mentioned earlier, aggregate earnings estimates for 2023 excluding energy are already down more than -11% since mid-April. We may see a few more downward adjustments to estimates over the next few weeks after seeing the third quarter results. But we have nevertheless already gone some way in bringing the estimates to a fair or appropriate level.

This is especially true if the economic downturn ahead of us turns out to be more of the garden variety than the last two such events. Recency bias forces us to use the last two economic downturns, which were also among the most severe in recent history, as benchmarks. But we have to be careful about this natural trend because the fundamentals of the economy currently remain exceptionally strong.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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