Earnings Have Been Decent. Now Comes the Hard Part.
Earnings season has been far from perfect, but it’s been just strong enough to keep stocks rallying.
For starters, companies have beaten profit expectations. Roughly 90% of companies in the S&P 500SPX +1.73% have reported second-quarter earnings, and the aggregate earnings per share result for companies on the index has beaten expectations by 5.2% as of Wednesday, according to Credit Suisse. That’s in line with the average quarterly beat since 2016.
But earnings results are backward looking, and still-high inflation plus rising interest rates are eating into consumer demand, dimming the earnings outlook from here.
That’s showing up in companies’ guidance. As of Wednesday, 61% of the companies issuing third-quarter earnings have provided outlooks below expectations, according to FactSet. That’s just above the five-year average of 60%.
Analysts, too, have become more pessimistic on future profits. The aggregate S&P 500 earnings estimate for 2023 has dropped almost 3% since June, according to Evercore, to $245 per share.
Yet stocks have largely risen through the negativity. The average stock reaction the day after a company beats on both sales and earnings has been a gain of 1.3% as of Wednesday, according to Evercore. That’s above the five-year average of a 0.9% gain. The average move after a firm misses on both the top and bottom lines has been down 2.7%, less than the average drop over the last five years. Meanwhile, the S&P 500 is up about 15% since its mid-June intraday low for the year, which came just before earnings season began.
That’s because stocks were already cheap—reflecting a more negative scenario—heading into earnings. The S&P 500’s forward price/earnings multiple bottomed at just over 15 times in mid-June from over 21 times at the start of the year. That meant before earnings season, stock prices were reflecting the possibility of a much lower steam of future profits, so stocks have been able to gain even after slight cuts to forward estimates.
“Going into earnings season, expectations, whisper numbers had gotten extremely negative,” said Sevens Report’s Tom Essaye. “That created a very low bar that the results surpassed.”
The positive market response to earnings, to be sure, hasn’t applied to every stock. Nvidia (ticker: NVDA) and Micron Technology MU +4.36% (MU) both lowered their earnings outlook, citing weakening demand for chips and saw their stocks fall significantly in one day. Target TGT +1.70% (TGT) and Walmart (WMT) also cut their outlooks, citing markdowns on discretionary items, causing their stocks to plummet.