The third quarter 2022 earnings season is almost complete and has provided some useful insight into how the corporate sector of the economy is performing and how it is expected to perform in the coming quarters.
According to Factset, as of November 11th, the blended y/y earnings growth for S&P 500 companies was 2.2% (with 91% of companies having reported). If this growth rate is held, it would be the lowest earnings growth rate since Q3 2020. While overall earnings are slightly positive, there has been a wide divergence among the different industry groups within the S&P 500. Only four industry groups (Energy, Real Estate, Industrials, Consumer Discretionary) reported positive y/y growth in Q3. Energy was the main driver of growth at +137%. In fact, when excluding Energy, the remaining S&P 500 growth rate was -5.3%. Another important insight from Q3 earnings reports is the impact on corporate profit margins. While overall earnings growth was 2.2%, revenue growth was 10.6%. This means that corporate profit margins declined during the quarter. The change in profit margins varied across industry groups, similar to overall earnings. Energy and Industrials were the only industry groups where a majority of companies reported an increase in profit margins, while six industry groups had 70% or more companies report a decrease in profit margins. Declining profit margins can be a leading indicator for spending cuts, including labor.
Source: FactSet.
Another important takeaway from the most recent earnings reports was the updated estimates for Q4 and calendar year 2023. FactSet estimates for S&P 500 companies in Q4 2023 decreased from 3.7% at the end of September, to -1.7% on November 11th. There are only three industry groups expected to report positive y/y growth in Q4, with energy at almost 70% growth. This means that the rest of the index is expected to report a decrease of -4.4%. Revenue growth estimates for S&P 500 companies in Q4 are 4.4% (down from 6.3% at the end of September), which would be another quarter of decreasing profit margins.
Source: FactSet.
Current earnings growth estimates for S&P 500 companies in 2023 are 5.8% (down from 8.2%) with revenue growth of 3.3% (down from 4.4%). The earnings growth rate in 2023 is expected to improve over the course of the year. Estimates for Q1 and Q2 are +1.7% and +1.1%, respectively (on revenue growth of 3.8% and 1.1% respectively), followed by +6.7% in Q3 and 9.8% in Q4.
Source: FactSet.
Current estimates are projecting that corporate profit margins for S&P 500 companies will decrease or be flat for four consecutive quarters before expanding in the second half of 2023. This will likely cause companies to look for ways to reduce expenses, putting downward pressure on the labor market. If estimates for 2023 are revised lower, that downward pressure could accelerate.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC