HomeMost PopularInvestingAnalyzing Q3 Earnings & the Impact of Higher Interest Rates

Analyzing Q3 Earnings & the Impact of Higher Interest Rates

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As the quarterly earnings season begins, investors are shifting their focus from rising treasury bond yields to the performance of companies. The recent increase in yields can be attributed to the Federal Reserve’s belief that interest rates will remain elevated for an extended period, driven by the remarkable resilience of the U.S. economy.

This resilience is evident in the improving earnings outlook, which we have highlighted in recent months. The trend of declining earnings estimates has stabilized since April, with notable positive revisions in sectors such as Tech, Construction, Autos, Consumer Discretionary, Industrial Products, and Retail.

However, the Energy sector has experienced weakness, leading to downward revisions in earnings estimates. Despite this, aggregate earnings estimates would be modestly higher since April if not for the Energy sector’s decline.

Q3 Earnings Outlook

Advanced results for the third quarter of 2023 are already being released, with an expected earnings decline of -2.1% for the S&P 500 compared to the same period last year. Revenues are anticipated to be +0.6% higher. This follows a Q2 earnings decline of -7.1% on +1.1% higher revenues.

The chart below provides further insights into the year-over-year Q3 earnings and revenue growth, giving context to recent trends and future expectations.

Zacks Investment Research
Image Source: Zacks Investment Research

The chart indicates that Q3 2023 is expected to be the last period of declining earnings for the S&P 500, as positive growth is projected to resume from Q4 onwards. With the exception of the Energy sector, earnings growth for Q3 would already be positive.

The chart below highlights the index’s year-over-year earnings growth without considering the Energy sector’s impact.

Zacks Investment Research
Image Source: Zacks Investment Research

Looking at net margins, the chart below shows that Q3 is expected to mark the 7th consecutive quarter of declining margins. However, excluding the Energy sector, net margins would show a modest increase compared to the same period last year.

Zacks Investment Research
Image Source: Zacks Investment Research

One sector that has made significant progress in improving margins is the Tech sector, which experienced a positive year-over-year comparison in the preceding period. The chart below demonstrates this trend.

Zacks Investment Research
Image Source: Zacks Investment Research

Examining the earnings and revenue growth on an annual basis, the chart below provides a comprehensive picture.

Zacks Investment Research
Image Source: Zacks Investment Research

By considering expectations for the upcoming years, it becomes evident that there is a discrepancy between the current bottom-up aggregate earnings estimates and concerns about an economic downturn. Notably, economic analysts have been steadily reducing the probability of a recession in recent months.

This Week’s Notable Earnings Releases

The Q3 earnings season will gain momentum with the release of quarterly numbers from major banks next week. This week, we can expect earnings reports from 12 S&P 500 members, including JPMorgan (JPM), Pepsi (PEP), and Delta Air (DAL).

It’s important to note that the results from JPMorgan, Pepsi, and Delta this week are not the first earnings reports to be included in the 2023 Q3 tally. Oracle and 19 other S&P 500 members have already reported results for their fiscal periods ending in August, which are counted as part of the September-quarter tally.

Thus far, the 20 companies that have reported early results have shown a +2.3% increase in earnings and a +4.3% increase in revenues compared to the same period last year. Moreover, 85% of these companies have beaten EPS estimates, and 65% have beaten revenue estimates.

The comparison charts below provide a historical context for the Q3 earnings and revenue growth rates at this early stage.

Zacks Investment Research
Image Source: Zacks Investment Research

Zacks Investment Research
Image Source: Zacks Investment Research

For a more detailed analysis of the overall earnings picture, including expectations for future periods, please refer to our weekly Earnings Trends report. The Q3 Earnings Season Kicks Off?

Conclusion

While rising treasury bond yields have captured the market’s attention, the focus is now shifting to quarterly earnings releases. Despite concerns about the Energy sector, overall positive earnings revisions signal the resilience of the U.S. economy. The Q3 earnings season shows signs of improvement, with expectations for positive growth in future quarters. Additionally, net margins are expected to increase when excluding the Energy sector. It is crucial for investors to monitor the upcoming earnings releases from key sectors and companies to make informed investment decisions.

Please note that the views and opinions expressed in this article are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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