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:
- We’re off to a good start for the second quarter earnings season, with most companies not only beating estimates, but also providing reasonably reassuring guidance for periods ahead.
- For the 50 S&P 500 companies that reported Q2 results, total profit was up +4.4% from the same period last year, with revenue up +8.6% , with 82% exceeding EPS estimates and 66% exceeding revenue estimates.
- Given the below-average magnitude of negative revisions to Q2 estimates prior to the start of the release cycle, this above-average EPS percentage overshoot can be interpreted as a favorable development in underlying earnings trends.
- The earnings decline in Q2 2023 would follow the decline of -3.4% in Q1 2023 and the decline of -5.4% in Q4 2022. Third quarter 2023 earnings are expected to be the last period of decline, with growth resuming from the fourth quarter.
For the second quarter of 2023, S&P 500 earnings are expected to decline -9.3% from the same period last year with revenue down -0.5%. This would follow the -3.4% decline in index earnings in the prior period (Q1 2023) and the -5.4% decline in the last quarter of 2022.
In other words, the second quarter of 2023 is expected to be the third consecutive quarter of declining earnings for the S&P 500. A further decline in third quarter earnings of -1.9% is currently expected, after which growth will become positive in the fourth quarter and will continue in 2024.
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As you can see from this quarterly earnings growth forecast, the dreaded recession does not show up in this near-term earnings outlook. An overview of long-term corporate profitability also doesn’t leave much room for a recession, as you can see in the chart below.
Image source: Zacks Investment Research
These growth expectations reflect current bottom-up consensus earnings estimates for individual S&P 500 companies which, in turn, are based on the estimates of individual sell-side analysts covering those companies.
Predicting recessions is beyond the core competence of typical equity research analysts. But they closely monitor the changing business trends of the companies and industries they follow. Analysts maintain elaborate financial models for the companies in their coverage, which allows them to offer their earnings, revenue, and other estimates.
At Zacks, we strive to closely monitor changes in analyst earnings estimates over time. In fact, our rating system, the Zacks Ranking, is based on earnings estimate revisions.
Regular readers of our earnings commentary will know that we have reported a noticeable stabilization in the estimate revision trend since the start of the second quarter of 2023, reversing the persistent negative trend that had been in place for nearly a year prior.
Earnings estimates in the S&P 500 aggregate have fallen only slightly since the start of April, with a number of key sectors starting to see modest positive revisions to estimates. These sectors include construction, industrial products, automotive, technology, medical and retail.
It is difficult to say at this stage if the revisions trend will remain on its recent positive trajectory or return to its initial negative trend. But it is nonetheless a market-friendly development.
Sector focus
All major banks released positive second quarter results and provided generally reassuring comments on the health of the economy, businesses and consumers.
The earnings focus is shifting to the mega-cap tech players who have led the strong market performance so far this year. We have Microsoft MSFT and Alphabet GOOGL on hand to report results after market close on Tuesday, July 25.ewith Meta META and Amazon AMZN reporting on the 26the and 27erespectively.
Each of these four companies are part of what we call the “Big 7 Tech Players,” with Apple, Tesla, and Nvidia as the remaining members of the club. Second-quarter estimates for Amazon, Microsoft, and Alphabet were very flat, while those for Meta rose on the back of management’s spending controls.
Microsoft and Alphabet have gone head-to-head in the AI “gold rush,” but the more immediate concern from a profitability perspective will be trends on the cloud spending front. The outlook on the cloud spending front appears to be turning cautiously optimistic, with some signs that the worst may be behind us.
Confirmation of this development, especially from Amazon, of which AWS is an undisputed cloud leader, will help solidify the group’s gains so far, even if much of the stock market optimism is centered on the AI.
For the Big 7 Tech Players as a whole, Q2 earnings are expected to be up +14.1% over the same period last year with revenue up +7.9%, as the shows the graph below.
Image source: Zacks Investment Research
The graph below presents the picture of the group’s profits on an annual basis.
Image source: Zacks Investment Research
Second-quarter earnings for the tech sector as a whole are expected to be down -4.5% from the same period last year on flat revenue. Estimates have increased slightly since the start of the period, largely reflecting more effective controls.
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