The second quarter 2023 earnings season is in full swing. Next week will be the first big one of this season with 987 companies expected to release their financial numbers. Market participants will try to analyze this release cycle in the context of the Fed’s interest rate hike policies.
Therefore, this season, management advice and short-term business prospects will matter more than actual results. In addition to profits and revenue, margins will receive more attention from financial researchers.
Meanwhile, we’ve picked five S&P 500 stocks with favorable Zacks rankings that are poised to beat second-quarter earnings estimates next week. The combination of a possible earnings beatdown and a favorable Zacks ranking should drive their stocks in the near future.
The S&P 500 in Q2 at a glance
The market benchmark was impressive in the second quarter of 2023. After rising 8.3% in the first quarter, the S&P 500 index rebounded 7% in the April-June period. In the first half of 2023, the broad index jumped 15.9%, marking its best first-half performance since 2019. In the second quarter, the S&P 500 broke out of bear market territory and formed a new bull market.
The Fed’s decision to reduce the magnitude of the interest rate hike following a steady decline in the inflation rate led to a strong rally in growth sectors such as technology, communication services and consumer discretionary.
Second Quarter Earnings Earnings
As of July 19, 50 S&P 500 companies have released their results. Total profit for these companies was up 4.4% year-on-year, on revenue up 8.6%. Of these 30 companies, 82% exceeded EPS estimates while 66% exceeded revenue estimates.
At present, our estimate has shown that total S&P 500 earnings will likely fall 9.3% year-over-year with earnings 0.5% lower. The drop in profits in the second quarter would follow the 3.4% drop in the first quarter and a 5.4% drop in the fourth quarter of 2022.
Our top picks
We narrowed our search to five S&P 500 companies that are expected to report their second-quarter results next week. Each of our picks sports a Zacks Rank #1 (Strong Buy) and has a positive Earnings ESP. You can see the full list of today’s Zacks #1 Rank stocks here.
Our research shows that for stocks with the combination of a Zacks rank of #3 (Hold) or better and a positive earnings ESP, the probability of an earnings overshoot is as high as 70%. These shares should appreciate after the publication of their results. You can discover the best stocks to buy or sell before they’re flagged with our earnings ESP filter.
The chart below shows the price performance of our five picks over the past quarter.
Image source: Zacks Investment Research
Cadence Design Systems Inc. CDNS offers products and tools that help customers design electronic products. Through the System Design Enablement strategy, CDNS offers software, hardware, services and reusable IC design blocks to electronic systems and semiconductor customers.
Cadence Design has an ESP on gains of +0.67%. It has an expected earnings growth rate of 17.1% for the current year. The Zacks consensus estimate for current-year earnings has improved 0.6% over the past 90 days.
CDNS has recorded earnings surprises over the past four reported quarters, averaging 7.3%. The company is expected to release its results on July 24, after the closing bell.
Pulte Group Inc. PHM benefited from solid land acquisitions and operational strategic initiatives. PHM expects investment in land acquisition and development in 2023 to be between $3.5 billion and $4 billion, up from the previously projected value of $3.3 billion.
This is attributed to strong buyer demand and an increase in its construction activity. Earnings estimates for 2023 rose to $2.43 per share from $2.41 in the past 30 days, reflecting analysts’ optimism about PHM’s prospects.
PulteGroup has an ESP on earnings of +1.17%. The Zacks consensus estimate for current-year earnings has improved 0.5% over the past seven days. PHM has recorded earnings surprises in three of the last four reported quarters, averaging 15.6%. The company is expected to release its results on July 25, before the opening bell.
Ford Motor Co. F is likely to benefit from a strong vehicle mix supported by F-series trucks and SUV models, combined with a robust electric vehicle lineup. We expect Ford’s global wholesale shipments from the Ford Blue unit to increase by approximately 4% in 2023.
Ford’s ambitious overhaul plan to split its electric vehicle business into a separate unit within the company will open up opportunities for growth. Ford’s goal of producing more than 2 million electric vehicles by the end of 2026 (representing a CAGR of 49% over the period 2023-2026) bodes well.
Ford has a profit ESP of +3.73%. The Zacks consensus estimate for current-year earnings has improved 2.3% over the past 30 days. Ford has posted earnings surprises in two of the last four reported quarters, averaging 24.4%. The company is expected to release its results on July 27, after the closing bell.
PACCAR inc. PCAR is one of the leading names in the trucking industry with well-known brands such as Kenworth, Peterbilt and DAF. The new DAF range comprising the XF, XG and XD models bodes well.
Accelerated efforts towards electrification, connected vehicle services, advanced driver assistance system options should bolster PCAR’s prospects. High truck utilization and the increasing average age of the fleet are having a positive impact on PCAR’s spare parts segment.
PACCAR has an ESP on earnings of +1.32%. It has an expected profit growth rate of 36.4% for the current year. The Zacks consensus estimate for current-year earnings has improved 0.1% over the past 30 days.
PCAR has recorded earnings surprises over the past four reported quarters, averaging 16.6%. The company is expected to release its results on July 25, before the opening bell.
Tyler Technologies Inc. TYL is benefiting from higher recurring revenue, post-acquisition contributions from NIC, and a steady rebound in market and sales activity to pre-COVID levels. The public sector’s ongoing transition from on-premises and outdated systems to scalable cloud-based systems is a positive.
The growing trend towards hybrid working is also driving demand for TYL’s connectivity and cloud services. Our estimates suggest a CAGR of 7.7% for Tyler’s top line from 2023 to 2025. A strong liquidity position helps it pursue acquisitions. Key acquisitions should drive growth.
Tyler Technologies has an ESP on earnings of +0.54%. He forecasts a profit growth rate of 1.1% for the current year. The Zacks consensus estimate for current-year earnings has remained flat for the past 90 days.
TYL has recorded earnings surprises in three of the last four reported quarters, averaging 2.8%. The company is expected to report results on July 26, after the closing bell.
Stay on top of upcoming earnings announcements with Zacks Earnings Calendar.
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Ford Motor Company (F): Free Inventory Analysis Report
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