How low have third-quarter earnings estimates fallen?

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

Here are the key points:

  • The big picture emerging from the second quarter earnings season turned out to be quite good; not great, but not bad either. Importantly, the second quarter results and guidance for the current and future period turned out to be better than pre-season fears.
  • Estimates for the last two quarters of this year and for next year have started to decline, although positive revisions in the energy sector continue to partially offset negative revisions elsewhere.
  • The earnings growth of +2.4% expected for the S&P 500 index in the third quarter of 2022 is down from +7.2% at the start of the period. Excluding the energy sector, third quarter earnings are expected down -4% at present, down significantly from +2.1% in early July.
  • Looking at the calendar year chart, total earnings for the S&P 500 are expected to be up +6.5% in 2022 and +7.3% in 2023. On a non-energy basis, total earnings of the 2022 index would be up by +0.1% (instead of +6.5%, with Energy).

The overall picture of corporate profitability emerging from the second quarter earnings season, with just over 90% of S&P 500 results, continues to show the stability and resilience of key earnings drivers such as corporate spending. consumers and businesses.

As this stability and resilience bucks fears of an impending economic slowdown or even recession, we are starting to see telltale signs of emerging weakness in consumer and business spending. Walmart’s WMT pre-announcement is likely not solely due to weakness among low-income households, but that segment of consumers is nonetheless feeling the pressure, as companies in various industries, including AT&T T, have told us. Other households seem to be doing just fine, as banks, credit card companies and others have told us.

When it comes to enterprise spending, we’ve started to see a squeeze in advertising budgets and hiring plans, but Microsoft MSFT and others haven’t seen anything disconcerting when it comes to software and other spending. services. That said, it is reasonable to expect some moderation in demand trends going forward, as the full extent of the Fed’s tightening cycle ripples through the broader economy.

A slowdown has begun, but there is nothing in earnings data, management commentary or forecasts to suggest that the US economy is headed for a major economic downturn.

That said, estimates have started to decline, with the overall trend in revisions turning negative even after factoring in the continued trend of favorable revisions enjoyed by the energy sector.

You can see this in the trend of third quarter estimate revisions in the chart below.

Image source: Zacks Investment Research

Looking at the evolution of Q3 earnings growth expectations excluding energy, the expected growth rate has fallen from +2.1% on July 6 to -4% today. The graph below shows that the aggregate total earnings expected for the whole of 2023 have evolved on a non-energy basis.

Zacks Investment Research
Image source: Zacks Investment Research

As you can see above, aggregate S&P 500 earnings outside the energy sector are down -3.3% since mid-April, with double-digit percentage declines in retail. (down -14.5%) and construction (-11%), and high single drops. single-digit percentage declines for Tech (-9.1%), Industrials (-8.7%) and Consumer Discretionary (-8.9%).

The overall picture of earnings

Beyond the second quarter, growth should improve slightly, as you can see in the chart below which gives an overview of earnings on a quarterly basis.

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 strong as the earnings growth expected for the year 2022 is, it should be remembered that a large part of it is due to the unprecedented dynamics of the energy sector. Excluding the energy sector, full-year 2022 earnings growth for the rest of the index falls to just +0.1%.

Uncertainty about the outlook is growing, reflecting a lack of macroeconomic visibility amid the Fed’s tightening monetary policy. The evolving trend of earnings revisions will reflect this macroeconomic backdrop.

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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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