Earnings season kicks off in the US on Friday. Perhaps you heard.
Most readers hopefully perused my Q3 reporting season preview published last weekend, but given concurrent events in the Mideast, it might’ve been lost in the tragic mayhem.
In the interest of orienting market participants, it’s worth briefly recapitulating. If you go by consensus, last quarter likely marked the end of YoY earnings declines. At worst, the Street reckons, aggregate index EPS fell 1% from the same quarter a year ago.
Note that revision momentum is not only positive, but in fact the most positive ahead of any reporting season since the Q1 of last year on Bloomberg’s data. There are two ways to look at that. One says it bodes well: The worst is over. Another says it sets a high bar: It’s easier to “beat” when expectations are low. I won’t adjudicate.
The figures below, from Goldman’s David Kostin, give you a snapshot of what’s expected both for this quarter by sector (on the right) and in aggregate looking several quarters down the road (on the left).
“The concentration of mega-cap tech’s share of S&P 500 sales and profits poses a risk to the aggregate index if these companies fail to meet expectations,” Kostin remarked, noting that the so-called “Magnificent 7” accounted for 12% of 2022 S&P 500 sales and 17% of EPS. By 2025, Kostin added, “consensus expects mega-cap tech to contribute 15% of S&P 500 sales and 24% of EPS.”
Several readers have asked after a preview penned by BofA’s Savita Subramanian, who raised her S&P target late last month. Apparently, she was quoted by some mainstream outlet or another this week. I don’t know. For those interested, selected highlights from her Q3 preview are below. At the least, the bullet points are a helpful primer.
Via Savita Subramanian and Ohsung Kwon, BofA:
Better micro despite macro drama: S&P 500 3Q EPS was unchanged over the past three months (+0.1%) vs. a typical 4% cut into earnings (first no cut since 4Q21). Despite negative headlines (rate shock, oil shock, now geopolitics) macro data continued to beat expectations and the jump in rates and oil suggests improving, not deteriorating, growth. Our Corporate Misery Indicator, a macro gauge of profits, improved for the first time since 3Q22. China is a key risk but shows some positive trends. Consensus expects flat EPS in 3Q y/y (vs.-6% in 2Q), the first quarter of recovery. We forecast a sizeable 4% beat (vs. a typical 2% beat), or $58 (+4% y/y). We nudge up our 2023 EPS to $222 from $218.
AI is long-term; Infrastructure spend is now: AI is real, potentially boosting S&P operating margins by 250bps over the next 5 years. But any meaningful contribution may be some quarters away. A bigger near-term contributor will be fiscal stimulus via IIJA, then IRA. Incremental $550B over the next 5 years from the IIJA ($110B/yr run rate, 10% of non-res construction) will be a significant boost in the near-term. While citing it as a tailwind, companies were hesitant to put numbers around it in 2Q. But we may start to hear more clarity this quarter.
De-stocking in rearview. Goods > services: Earnings lagged GDP growth for the fifth straight quarter (historically, quarterly earnings outpaced GDP by 1.5ppt on avg. since 1950). The lag was partly due to the shift from goods (50% of earnings vs. 30% of economy) to services, which we believe is now over. Despite still muted signs of re-stocking, at least the de-stocking cycle is now over. Manufacturing PMI also started to catch up to Services PMI, which has historically been a tailwind to earnings vs. GDP.
FX tailwind today, headwind tomorrow. Oil can be positive: FX flipped to a tailwind for the first time since 3Q21, but recent USD strength presents a headwind in 1Q24. Higher oil prices have historically helped S&P earnings. Oil represents only ~3% of total costs and a consumption ‘shock’ is unlikely absent another spike in oil, where US energy independence could soften the blow. Easing wage pressure (40% of total costs) should more than offset the impact from oil.
