Second quarter earnings season is in full swing, with this being the busiest week that has the largest number of S&P 500 companies due to report results. As usual, investors are laser focused on the latest updates of how corporate America is performing, particularly for mega-cap Tech stocks to try and find out if their dramatic outperformance this year is justified. So far, so good, with encouraging results in recent days from some of the most prominent names like Alphabet & Meta. Even more encouraging is that for the overall S&P 500, companies have exceeded earnings estimates by the widest margin since 2021 so far (as shown in the first chart).
Bigger picture, the important information to be gleaned is the possibility that this quarter marks a positive inflection point for earnings. Earnings growth has slowed for seven consecutive quarters (turning negative for the past two) but is expected to begin improving from -12% in Q2, to 0% in Q3, and +8% by Q4. This is due in part to the economy handily outperforming expectations this year with the widely anticipated recession having still not materialized – underscored by this morning’s impressive Q2 GDP release. Accordingly, Wall Street analysts are beginning to revise their earnings estimates higher as can be seen in the Net Earnings Revisions Index, which just turned positive again for the first time since early 2022. As economic risks continue to diminish in the near term, earnings have room to improve and contribute to what has been an entirely multiple-driven move this year (Price rising with Earnings declining), which would be a welcome development for the sustainability of this rally.
Sources: CME Group as of 5/2/23
Carl Noble, CFA®
Senior Vice President of Investments
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