As we buckle up for the Q4 earnings season, an undeniable mix of excitement and trepidation is in the air. We’re all eager to predict the twists and turns that these financial reports will take us on in the coming weeks. (We also examined the impact of earnings on prices and volumes in Phil’s recent blog.)
Anticipating a Surge in S&P 500 Earnings Reports
Currently, only a paltry 10% of S&P 500 firms have reported their Q4 earnings (see chart below). However, the momentum is set to accelerate over the next five weeks, with an additional 80%+ of companies slated to reveal their financial performance by late February.
Q4 2023: Projections Turn Sour, but There’s Light Ahead
The last time we laid eyes on the chart below, Q4 earnings growth was heading for a positive territory. Alas, things have taken a turn, and the current trajectory indicates a looming nearly 2% year-over-year decline in earnings (depicted by the ominous orange bar).
Hope in the Q4 Earnings Revision Trends
Despite the larger-than-average downward revisions to earnings estimates in Q4, portrayed by Goldman Sachs’ chart below (indicated by the red line), hope flickers. The larger share (65%) of S&P 500 companies issuing negative guidance is abnormal, given that the typical rate stands at 59% ahead of earnings.
Nevertheless, there remains a glimmer of hope for positive Q4 earnings, as historical data suggests a pattern of downward-then-upward movement, as the chart illustrates. In the lead-up to earnings season, companies intentionally lower expectations to facilitate beating analysts’ projections—a strategy that bears fruit, with a remarkable 77% of companies typically surpassing expectations.
As the earnings season commences and companies start beating projections, earnings typically surge by 3-4%, aligning with the long-term average (dotted lines).
The average upward revisions during earnings season seem promising enough to pull the current negative 2% year-over-year earnings growth estimate back into the embrace of positive territory, as suggested in this expert prediction.
Consumer Firms Leading the Charge, While Others Struggle
Though the overall S&P 500 earnings paint a negative picture, the scenario plays out quite differently at the sector level.
In Q4, we observe a continuation of trends from previous quarters:
- Faring Well: Communication Services (Netflix, Meta, Google), Consumer Discretionary (Amazon, Airbnb, Starbucks), and Information Technology (Intel, Nvidia, Microsoft) are all on pace for impressive 15+% year-over-year earnings growth, signaling the ascendancy of consumer-driven sectors.
- Struggling: The same sectors that have been plagued with earnings recessions over the last few quarters experience a similar fate in Q4. Energy, Materials, and Health Care are set to witness earnings decline of 20% year-over-year or worse, owing to various market factors.
Further disparities manifest themselves:
- Challenges: Industrials are grappling with falling earnings due to weaker goods demand and a decline in airline profits, precipitated by flagging spending and falling fares.
- Financial Sector Woes: Financials are witnessing negative earnings growth as banks navigate slower lending, larger loan losses, and a substantial one-time payment to the FDIC due to the regional bank crisis.
The Q4 earnings narrative seems to echo the age-old tale of haves and have nots in the financial landscape—where some sectors revel in robust earnings, while others grapple with distressing negatives.
Nonetheless, history tells us that a bounce in earnings often materializes as more companies report, leaving a window open for the return to positive earnings growth in Q4. The coming weeks will unravel the ultimate fate.
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