Earnings season is here, believe it or not, and given the pervasive macro ambiguity weighing on sentiment, equities could use a little help from corporate management.
As usual, JPMorgan’s report marks the unofficial start of the festivities. Citi and Wells Fargo will join the House of Dimon in releasing Q3 results on October 13.
Consensus expects no growth in aggregate, which actually counts as the most optimistic outlook since Q4 of last year. Remember: We’ve been trudging through a shallow profit recession, although you wouldn’t know it by the S&P’s performance in the first half.
I suppose stocks’ H1, valuation-driven rally amid what analysts believe was the worst of profit decline was a reminder that the market generally doesn’t assign a trough multiple to trough earnings. Excluding energy, EPS probably grew 6% YoY in Q3, analysts reckon.
Plainly, the “profit reckoning” thesis didn’t pan out. There was an earnings recession, but the combination of lingering pricing power in a still resilient US economy (where the consumption impulse never died) and S&P 500 companies’ insulation from higher interest rates (through fixed-rate, longer-term debt) helped limit margin compression.
Of course, bears will insist the reckoning wasn’t avoided, just pushed out. But as the figure above shows, if there’s supposed to be a deeper earnings recession on the horizon, it’ll stand in stark contrast to consensus. I know, I know, stranger things have happened. The point is just that the earnings contraction we saw this year simply didn’t live up to the billing.
Top-line growth is seen at 2% YoY for Q3. That’s obviously a function of the “Energizer Bunny economy,” as Larry Summers put it Friday. The stronger dollar is a sales growth headwind, but consensus will have that baked in.
Margins for America’s largest, publicly-traded companies probably contracted for the fifth straight quarter on a YoY basis, but as the figure on the left (below, from Goldman) shows, profitability for most sectors is still very elevated.
The figure on the right speaks for itself. It’s another testament to big-tech exceptionalism.
It’s worth noting that the bar is a little higher this reporting season. In the lead up to Q1 and Q2 earnings, analysts trimmed estimates, but for Q3, forecasts for EPS growth were generally flat. So, companies will still “surprise” to the upside, but as Goldman suggested, “the magnitude will likely be smaller.”
Speaking of Goldman, David Kostin reiterated both his 2023 and 2024 S&P 500 EPS estimates of $224 and $237, respectively. The risks, he said, are “balanced.” Overall economic growth will probably hold up ok next year, according to the bank’s economists, but if that’s the case, it’ll mean “higher-for-longer” rates. “Sustained elevated interest rates, dampened buyback activity and the recent tightening in financial conditions are headwinds that could limit upside to profit growth,” Kostin remarked.
For what it’s worth, Goldman also unveiled a 2025 S&P 500 EPS forecast. It’s $250, predicated on 5% sales growth and modest margin expansion.
“The 2025 macro backdrop is expected to resemble that of 2024: Near-trend US economic growth, moderating inflation, oil prices remaining above $90 and 10-year Treasury yielding above 4%,” Kostin went on.
You know what they say about predictions. They’re hard. Especially about the future.
