2023-08-13 13:00:00
Equity investors have been pleased with the lackluster performance of U.S. companies so far this year, but they may not be so easy to please for the rest of 2023.
As the second-quarter earnings season draws to a close, S&P 500 results paint a mixed picture, with companies beating analysts’ earnings expectations at a record rate in nearly two years, even as revenue forecasts fell to their lowest level since the start of 2020.
Investors seem content with this situation, for now. The S&P 500 has edged higher since the earnings season began in July, with the benchmark rising 16% in 2023. Investors could be far less forgiving if companies fail to deliver results in the current of the year, given the increase in equity valuations.
“Markets expect earnings to be higher than they have been so far,” said Eric Freedman, chief investment officer at US Bank Asset Management. “This is a market that has risen in anticipation of profits that we have yet to achieve.
Overall, second-quarter earnings are expected to have fallen 3.8% from a year earlier, according to IBES data from Refinitiv. The decline follows a 0.1% increase in the first quarter and a 3.2% drop in the fourth quarter of last year.
However, the results should improve. Third-quarter earnings for the S&P 500 are expected to rise 1.3% year-over-year, ahead of a 9.7% rise in the fourth quarter and 11.9% overall, according to Refinitiv. year 2024.
Meanwhile, the S&P 500 has become more richly valued. The index was trading Thursday at 19.1 times forward 12-month earnings, versus a long-term average of 15.6 times, according to Refinitiv Datastream. The P/E ratio ended 2022 at just under 17x.
This year’s rise in valuations accounted for 86% of the S&P 500’s year-to-date performance through July, with the rest of the market’s momentum coming from positive changes in earnings estimates, according to a report. analysis by Credit Suisse equity strategists.
“At this point, valuations have outpaced fundamentals and companies now need to prove they can deliver earnings growth,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial.
SECOND QUARTER RESULTS
According to Refinitiv IBES, 91% of S&P 500 companies reported their second-quarter results, and 78.7% of them posted earnings that beat analysts’ expectations. Overall, companies reported earnings 7.7% above expectations, compared to a long-term average of 4.1% above estimates. Both the exceedance rate and the surprise factor are the highest since the third quarter of 2021.
However, when it comes to revenue, only 62.9% of companies exceeded expectations, the lowest rate of exceedance since the first quarter of 2020.
Share reaction to the results has also been lukewarm, with stock prices showing weaker reactions to results above or below expectations than the past five-year average, Evercore ISI analyst Julian Emanuel said. The average stock fell 0.6% after second-quarter results, Emanuel said in a note released Thursday.
“We went from a market that said ‘earnings needed to be supported’ to ‘luckily earnings didn’t ruin everything’,” said John Lynch, chief investment officer for Comerica Wealth Management. “It takes us into a more expensive area.
Meanwhile, there were also high-profile disappointments, with Apple shares falling 4.8% after the iPhone maker’s weak sales forecast. Other large-cap companies, such as Amazon and Alphabet, have been well received by investors.
Companies to report results next week include major retailers such as Walmart and Home Depot, while Tuesday’s monthly retail sales release could also influence markets.
While investors are generally more positive about the economic outlook, some are still wary of a recession due to the delayed impact of rising interest rates, as indicators such as the Treasury yield curve continue to shift. give warning signs.
Such a recession could dramatically alter the outlook for corporate earnings and weigh on valuations. According to Ned Davis Research, profits drop an average of 24% per year during recessions.
“There’s optimism, but I still wonder if we’re not too optimistic, consensus-wise, going into next year,” Comerica’s Lynch said. “Just because we haven’t had a recession this year doesn’t mean the yield curve continues to point to one.
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