- The 2023 Q3 earnings season kicks off tomorrow with major U.S. banks leading the way
- Despite the bleak backdrop, S&P 500's Q3 earnings outlook is not as bad as expected
- This earnings season is set to be a mixed bag with some sector-specific winners
While a few companies have already reported results, it is safe to say that the Q3 2023 earnings season will only kick into high gear tomorrow, spearheaded by major U.S. banks. Against a backdrop of economic uncertainty, high interest rates, subdued consumer confidence, and geopolitical tensions stemming from the Israel-Hamas conflict, investors could certainly use some good news.
However, corporate expectations leading up to the season are showing a more mixed backdrop for S&P 500 companies.
In a nutshell, Q3 is expected to witness a 0.3% year-on-year earnings dip, marking the fourth consecutive quarter of decline. It's worth noting that this projected decline for Q3 is the smallest in this four-quarter series, fostering hopes that Q3 2023 may represent the earnings decline's trough.
Concerning corporate EPS expectations, FactSet data shows that 118 S&P 500 companies have issued forecasts for Q3 2023, with 64% being bearish and 36% taking an optimistic stance.
Still, the overall outlook for the third quarter appears somewhat less negative compared to recent quarters as the number of companies issuing pessimistic earnings forecasts aligns with the 10-year average.
Moreover, among the twenty S&P 500 companies that have already reported results for Q3, 17 have surprised to the upside with 14 S&P 500 reporting a positive revenue surprise as well.
From a sector viewpoint, eight out of the eleven sectors are forecasted to achieve year-on-year earnings growth, with the communications services and consumer discretionary sectors leading the way. In contrast, the Energy, Materials, and Healthcare sectors are expected to experience year-on-year earnings declines.
Let's delve deeper to discern which sectors are poised for outperformance and which ones investors should consider avoiding investing into ahead of earnings.
Sector Forecasts: The Biggest Winners and Losers in Terms of EPS Expectations
In more detail, we note that the consumer discretionary sector (NYSE:XLY) sector saw the biggest increase in estimated earnings, up 8.5% to $42.3 billion, representing a year-on-year earnings growth rate of 22.0%. Amazon (NASDAQ:AMZN), among others, contributed significantly to this increase.
The energy sector (NYSE:XLE) saw a 5.7% increase in earnings estimates, with analysts forecasting a -37.7% year-on-year decline. Marathon Petroleum (NYSE:MPC) and Valero Energy (NYSE:VLO) were the largest contributors.
For the information technology sector (NYSE:XLK), earnings forecasts rose by 4.2%, for a year-on-year earnings growth rate of 4.6%, with NVIDIA (NASDAQ:NVDA) and Intel (NASDAQ:INTC) the biggest contributors.
Meanwhile, for the communication services sector (NYSE:XLC), EPS estimates rose by 4.1%, with Meta Platforms (NASDAQ:META) and Alphabet (NASDAQ:GOOGL) as significant contributors, for an estimated annual earnings growth rate of 31.5% for Q3.
The materials sector (NYSE:XLB) saw a decline in EPS forecasts in recent months which has been significant, reaching -12.9%, which would translate into a year-on-year earnings decline of -22.4%. Dow (NYSE:DOW) is the main contributor to this decline.
The industrial sector (NYSE:XLI) sector also saw heavy downward revisions to earnings forecasts, at -8.7% of estimated earnings, which translates into a year-on-year earnings growth rate of 3.5%. In this respect, Boeing (NYSE:BA) is a priori the main culprit.
Finally, the healthcare sector (NYSE:XLV) reported a -4.4% drop in estimated earnings, translating into a -11.9% year-on-year decline. Moderna (NASDAQ:MRNA) and Pfizer (NYSE:PFE), among others, contributed to this drop in earnings forecasts.
Conclusion
U.S. companies are set to report earnings against a backdrop filled with uncertainty, where recession worries, hints of a Fed policy shift, and rising geopolitical tensions paint a complex picture. This sets the stage for potentially varied outcomes, with sectors displaying significant differences in performance.
As investors chart their course through the weeks ahead, they'll need to tread cautiously, meticulously dissecting the results to decipher whether a splendid year-end awaits or if the storm clouds are yet to disperse.
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Disclaimer: The author does not own any of these shares. This content, which is prepared for purely educational purposes, cannot be considered investment advice.