Q1 Earnings Season Explains the Melt UpBy datatrekresearch in Blog
US Q1 earnings season is half over, and a combination of the results to-date and how Wall Street analysts are responding to them explains why the S&P 500 is pushing through 6-month highs.
Two points on this topic:
First, Q1 is starting to look like it was a good, if not great, quarter versus expectations. Consider the following data, courtesy of FactSet’s latest Earnings Insight report (link below):
- 79 percent of companies have beaten analysts’ earnings estimates. That is much better than the 10-year average of 73 percent.
- In the aggregate, companies have exceeded earnings per share expectations by 6.9 percent. That is also better than the 10-year average of 6.4 percent.
- 74 percent of companies have beaten the Street’s revenue estimates. Again, this is much better than the 10-year average of 63 percent.
- In the aggregate, companies have exceeded revenue estimates by 2.1 percent. That’s almost double the 10-year average of 1.3 percent.
Comment: Wall Street analysts took a sharp knife to their Q1 revenue and earnings estimates both before and after Q4’s disappointing results in February/March, but they clearly went too far. That is why we’re having an upbeat Q1 earnings season.
Second, analysts have taken Q1 results as a signal to start raising their 2H 2023 and 1H 2024 earnings estimates. We have annotated the FactSet chart below to show how much the Street has reduced their Q2 2023 – Q2 2024 numbers so far this year (lower line of numbers, all in red) and how much they raised them last week (upper line, mostly in green).
The bottom line here is that S&P 500 earnings estimates are starting to go up, and that’s why the index has caught a tailwind again. We’ve seen 2 rallies so far in 2023. The first was a classic “January effect” move higher, which ended on February 2nd. The second rally started in mid/late March, as markets began to discount the earnings results we are seeing now and the Street’s positive revisions to future earnings estimates.
The problem with this bullish story is that estimates are likely still too high. As we note in the chart, analysts believe the S&P 500 can earn all-time record quarterly profits in Q4 2023 and thereafter. That seems unlikely given slow US/global economic growth.
Even still, it is hard to be overly bearish when earnings estimates are rising. Even if Q4 2023 and 1H 2024 earnings estimates are excessively optimistic, an S&P 500 earning $52 - $55/share equates to $208 - $220/share in annualized earnings power. That means the index is trading for 19 – 20x future earnings. While that may sound rich – and it is – investors can feel a bit of comfort that there is some upside to those estimates if companies continue to cut costs and no recession takes hold.
Takeaway: We think US equities grind modestly higher through the rest of Q2 2023, supported by positive earnings revisions and lower interest rates. We still see plenty of risks to stocks over the rest of 2023, but the current market setup is biased to the upside.
FactSet Earnings Insight report: https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_042823.pdf