It’s official (almost): The US corporate earnings recession is over (with 89% of index market cap reporting).
Headed into reporting season, consensus expected flat YoY earnings. So, no growth. Instead, S&P 500 companies collectively managed to grow the bottom line by 4% compared with the same period a year ago.
If you strip out energy, earnings growth was 10%.
Assuming the upside to consensus holds, Q3 will go down as the first quarter of positive YoY growth in a year. This profit recession was short and shallow.
As Goldman’s David Kostin detailed, 59% of reporters beat on the bottom line by at least one standard deviation, considerably better than the historical average of 48%.
Notably, margins improved 50bps from Q2, to 11.6%, 40bps better than consensus saw at the beginning of October. Analysts expect that trend to reverse in the current quarter.
Sales growth, by contrast, disappointed, or at least in terms of the prevalence of beats. Just a third of firms managed to beat consensus on the top line, 10ppt below the first-half rate. Overall, sales growth was just 3%.
There’s some consternation around revisions. Current-quarter estimates have been cut by around 4% so far. 2024 profit forecasts are down around 1%.
And yet, as Kostin pointed out, that isn’t unusual. “Negative revisions to Q4 EPS during Q3 earnings season appear to be a return to the typical pattern,” he wrote.
Looking back nearly two decades, quarterly EPS estimates fall by 6% in the months prior to reporting season, consistent with the current trajectory of revisions to Q4 EPS forecasts.
The same can generally be said of the cuts to 2024 estimates. Historically, year-ahead estimates drop by 1% during the first month of Q3 reporting season.
Happily, it’s now more likely that companies will “beat” (note the scare quotes) when they report Q4 results early next year. “The cuts to Q4 2023 EPS estimates since the end of September now suggest sequential margin contraction, once again setting a low bar for companies,” Kostin went on, noting that consensus now implies 75bps of margin compression from Q3 to Q4.
“Although seasonality could weigh on margins in Q4, stocks have consistently beat margin expectations in the first three quarters of the year and input cost pressures continue to ease,” Kostin said.
