We are entering the final stretch of Q3 earnings reporting season. As of yesterday, 310 companies representing roughly 66% of the market capitalization of the S&P 500 index have already reported results. Another 121 companies are scheduled to report before the end of next week, at which point the season will slowly die down, with the remaining stragglers spread out over the following few weeks.
Results so far have been much better than expected. Before companies began reporting, Q3 earnings were expected to fall by 0.3% compared to the same quarter a year ago, which would have marked the fourth consecutive quarter of year-on-year earnings declines. However, earnings reported so far have been 7.8% higher than expected, which has put them on track to come in 2.7% higher than the same quarter a year ago. This would mark the first quarter of year-on-year earnings growth since Q3 2022. The strong showing we have seen so far is the result of both better-than-expected revenue growth (+2.1% versus 1.6% expected) and a widening in profit margins (12% versus 11.9% a year ago). In turn, these can be attributed to a stronger than expected economy during the quarter, and to a continued easing of inflationary pressures.
From a sector perspective, consumer discretionary has been the sector posting the strongest earnings growth (+52.5%) and the biggest positive surprise (+14.2%), largely thanks to its heavyweight Amazon, which benefited from strong consumer spending during the quarter. At the other end of the spectrum we find the energy sector, which has been reporting the weakest earnings growth (-36.9%) and also negative surprises (-3.6%). Lower oil prices compared to a year ago are the main culprit behind the energy sector’s earnings decline. It is worth noting that if the energy sector were excluded, the aggregate earnings growth rate for the S&P 500 index would improve to 8.4% from 2.7%.
Despite the overall positive results described above, the market response has been underwhelming. Companies that reported positive earnings surprises for Q3 have seen an average stock price decrease of -1.0% around the report date, compared to a five-year average price increase of +0.9%. That is because the narrative has been dominated by the surprisingly negative guidance that companies have been issuing regarding future profits. Out of the 42 companies in the S&P 500 index that have issued guidance for Q4 2023, 67% have issued negative guidance, which is above the five-year average of 59%. Analysts have been reacting to this by downgrading their earnings estimates for Q4 2023, as well as for CY 2024. So far, this has not been enough to put a serious dent in the earnings recovery that the consensus still expects for next year, with 2024 earnings still projected to be 11.8% higher than 2023 earnings. However, that could change if this trend of negative guidance persists, and if the economy downshifts from its current strong growth trajectory, as we expect it will. At the same time, a further easing of inflationary pressures should continue to aid the margin recovery, which could put a floor under earnings growth, keeping it rangebound.
Q3 2023 Earnings Growth and Surprises by Sector
Source: Bloomberg, as of 11/1/2023
Consensus Points to Earnings Recovery Ahead
Source: FactSet, as of 11/1/2023
Q3 Earnings Season Progress
Source: Piper Sandler, as of 11/1/2023
Sauro Locatelli CFA, FRM™, SCR™
Director of Quantitative Research
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