Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>
Here are the key points:
Total S&P 500 earnings for 2023 Q1 are expected to be down -9% from the same period last year on +1.9% higher revenues. This would follow the -5.8% decline in the preceding period’s earnings (2022 Q4) on +5.5% higher revenues.
Estimates have come down the most for the Aerospace, Basic Materials, Autos, Consumer Discretionary, Retail, Medical and Transportation sectors. The Utilities sector is the only one that has enjoyed modest positive revisions since the start of January.
While the direction of 2023 Q1 earnings estimates is in-line with the trend we have been seeing over the few quarters, the magnitude of negative revisions is smaller relative to what we had seen in the comparable periods for the preceding two quarters.
Earnings estimates for full-year 2023 have been coming down as well. From their peak in mid-April 2022, the aggregate total for the year has been cut by -12.4% for the index as a whole and -14.5% excluding the Energy sector’s contribution.
The Tech sector has gotten off to a great start in 2023, handily outperforming the S&P 500 index in the year-to-date period. While Tech stocks have lost ground over the last few weeks, the Zacks Tech sector is still up +12.1% in the year-to-date period vs. the +3.9% gain for the market as a whole.
This came after a tough year for the group in 2022 when Tech stocks were big-time losers. The Zacks Tech sector lost -36.2% of its value in calendar year 2022, clearly underperforming the S&P 500 index’s -20.7% decline.
These stocks’ recent positive follow through has a lot to do with the market’s evolving expectations of an end to the Fed’s tightening cycle. Higher interest rates resulting from the hawkish Fed posture are a big headwind for these ‘long-duration’ stocks, a big portion of whose value comes from profitabiltiy in future years.
The onset of monetary policy headwinds last year coincided with the group adjusting to the post-Covid world. As we all know, Tech companies were big beneficiaries of Covid-related disruptions. You can see this in the chart below that shows the Zacks Tech sector’s total earnings, actual as well as estimated, in billion dollars.
Zacks Investment Research
Image Source: Zacks Investment Research
The chart below shows the same data as growth rates
Zacks Investment Research
Image Source: Zacks Investment Research
The post-Covid adjustment view posits that the 2021 jump in the group’s earnings brought forward profitability from future years. As you can see in the above two charts, the market expects this ‘adjustment’ to last through this year, with ‘regular’ growth resuming next year.
The Tech sector’s earnings outlook has been weighed down by the combined effects of post-Covid adjustment and softening demand as a result of the Fed tightening. The chart below shows how the Tech sector’s 2023 earnings estimates have evolved since the start of last year
Zacks Investment Research
Image Source: Zacks Investment Research
As noted earlier, aggregate 2023 earnings estimates for the group have been cut more than -20% since April last year. The magnitude of cuts to some of the major players in the space such Alphabet GOOGL, Meta META, Nvidia NVDA and others is even more pronounced.
The Earnings Big Picture
For the current period (2023 Q1), S&P 500 earnings are currently expected to decline -9% from the same period last year on +1.9% higher revenues.
As has been the case over the few quarters, estimates for 2023 Q1 have been steadily coming down, as the chart below shows
Zacks Investment Research
Image Source: Zacks Investment Research
Please note that the magnitude of cuts to Q1 estimates is relatively lower compared to what we saw in the comparable periods for the last few quarters.
The chart below shows the evolution of aggregate earnings estimates for 2023 since the start of 2022.
Zacks Investment Research
Image Source: Zacks Investment Research
As noted earlier, the current aggregate earnings total for the index approximates to an index ‘EPS’ of $215.23, down from $242.98 in mid-April, 2022.
The chart below tracks these index ‘EPS’ values since the start of 2022. Please note that these ‘EPS’ values are imputed approximations and have been previously published on the dates listed in the chart below.
Zacks Investment Research
Image Source: Zacks Investment Research
Expectations for the Coming Periods
The chart below provides a big-picture view of earnings on a quarterly basis. The growth rate for Q4 is on a blended basis, where the actual reports that have come out are combined with estimates for the still-to-come companies.
Zacks Investment Research
Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on an annual basis.
Zacks Investment Research
Image Source: Zacks Investment Research
As mentioned earlier, 2023 aggregate earnings estimates on an ex-Energy basis are already down by more than -14% since mid-April 2022. Perhaps we see a bit more downward adjustments to estimates over the coming weeks, after more companies report Q4 results and provide guidance along the lines of what we saw with Microsoft. But we have nevertheless already covered some ground in taking estimates to a fair or appropriate level.
This is particularly so if whatever economic downturn lies ahead proves to be more of the garden variety rather than the last two such events. Recency bias forces us to use the last two economic downturns, which were also among the nastiest in recent history, as our reference points. But we need to be cautious against that natural tendency as the economy’s foundations at present remain unusually strong.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
