3Q23 S&P 500 Earnings Growth Better than Expected

The busiest part of 3Q23 earnings season is in full-swing and companies have broadly exceeded consensus estimates. Roughly 80% of S&P 500 companies have reported 3Q23 results and both the number of positive earnings surprises and magnitude of these surprises are above their 10-year averages. As a result, the S&P 500 is on pace to post positive year-over-year earnings growth for the first time since 3Q22. In addition, the index is expected to report its 11th consecutive quarter of revenue growth in 3Q23. However, the percentage of companies reporting revenues above consensus estimates (62%) is lower than the 5- and 10-year averages of 68% and 64%, respectively. This week, we offer an update around 3Q23 earnings and some key things investors should pay attention to.*

S&P 500 expected to report earnings growth for the first time since 3Q22: The current blended year-over-year earnings growth rate for the S&P 500 is 3.7%, which is higher than the estimate of -0.3% at the end of the quarter. The current growth rate would still be below the 5-year average (10.6%) and 10-year average (8.4%), but it would mark the end of the earnings recession, which started during 4Q22 earnings season.
Communication services leading growth: The communication services sector is on pace to overtake the consumer discretionary sector as the largest contributor to S&P 500 earnings growth. This would be the first time this year the consumer discretionary sector would not be the largest contributor to earnings. Meta is the largest contributor to the communication services sector. If Meta were excluded from the calculation, the growth rate for the sector would have been +28.6% vs. +42.2%.
Financials remain resilient despite the macroeconomic environment: The financials sector is on pace to report the third-largest earnings growth rate of all 11 sectors (+18.1%). Positive contributions from, specifically JPMorgan Chase and Wells Fargo, helped the sector exceed expectations. If these two companies were excluded, the sector’s growth rate would have been +10.9% vs. +18.2%. However, financial companies reported increasing their provision for credit losses during the quarter amid tighter financial conditions, a slowing economy and acceleration in delinquencies and defaults.
Energy sector lags: The energy sector is reporting the lowest year-over-year earnings growth of all 11 sectors. If this sector was excluded from the index, the S&P 500 would report earnings growth of ~9.5%, instead of 3.7%. It is important to note, the average price of oil during the quarter was 10% below the average during the same quarter last year.
Multinational companies hurt by strong U.S. dollar: Multinational companies with more than 50% of their sales coming from outside the U.S. are being hurt by a strong U.S. dollar. In fact, these companies are reporting earnings declines of -4.7%, relative to earnings growth of 6.8% for companies generating more than 50% of their sales domestically. *

The Bottom Line:

While equities have welcomed the end of the recent earnings recession, companies are warning of economic softening into year end 2023 and 2024. In addition, S&P 500 earnings estimates for 2024 and 2025 are not reflecting the concern companies have expressed and we expect downward revisions.

Footnotes: *Earnings reported by Factset.