I’m going to change things up.
I usually share a high-rated stock within on our powerful Stock Power Ratings system in this space.
But this earnings season has been too big to ignore. I want to help you make sense of it all. Earnings show the profitability and financial stability of a company.
Every three months, investors turn their attention to these company earnings reports.
Today, I will do the same thing.
I’ll share with you how earnings are shaping up for the third quarter.
Then I’ll get into what that tells us about the immediate future of stocks.
Let’s get started.
Q3 Earnings and Revenue Trends
We’ve kicked off third-quarter earnings season.
Below are the sectors in the S&P 500 that have reported results to date:
Out of the companies that have reported, 72% beat their earnings per share (EPS) estimates.
The five-year average is 77%.
Fewer companies are beating their earnings projections.
The consumer discretionary industry leads the downturn, with almost half reporting earnings below expectations.
The earnings growth rate for companies already reporting, plus estimates for companies that haven't released data yet, is just 1.5% for the quarter.
This is way down from the projected rate at the end of September.
It's a little better news in terms of revenue:
- Seventy percent of the companies reporting so far have beaten their revenue projections. This is pretty much in line with the five-year average.
- Companies are reporting revenues are 1.3% above estimates, which is lower than the average over five years.
Overall, this means companies are still making money.
Just not as many are making as much as they have in the past.
What We Can Learn From These Trends
If the 1.5% growth rate in earnings holds, it will be the lowest reported by S&P 500 companies since third-quarter 2020.
FactSet reported that seven of the 11 S&P 500 sectors project a year-over-year decline in earnings.
Revenue is a different story.
The current revenue growth rate for S&P 500 companies is 8.5%.
If it holds, it will be the first time revenue growth for a quarter has been below 10% since fourth-quarter 2020.
The good news is all 11 major sectors of the market are reporting (or projecting) revenue growth this quarter.
A few things to consider, however:
- Energy companies will change EPS and revenue projections. EPS growth for energy companies in third-quarter 2021 was 1,198%, and revenue growth was 75.7%. Those are great advances, but the wider question is: Will they hold?
- Tech earnings and revenue don't look great. Projections are not great for tech companies. In the second quarter, tech earnings and revenue growth started strong but faded. EPS growth was close to 50%, and revenue growth was 22% in the second quarter of 2021. Remember that more than half of tech revenue relies on non-U.S. buying — making it sensitive to U.S. dollar strength.
- The dollar’s strength is a headwind. When foreign currency is weaker versus the U.S. dollar, imports are more expensive. This causes pain for countries around the world. Not buying as many American-made products because they’re more expensive cuts into a company's bottom line.
- Third-quarter 2022 figures look average, or even bleak. Because they are compared to third-quarter 2021 when EPS and revenue growth was tremendous. During the pandemic, analysts forecast growth down, which created a ton of beats (as I showed you with energy above). Year-over-year comparisons are fine, but it's best to compare these trends with past company performance or against companies in the same sector.
The bottom line is that companies that beat earnings rise in most cases.
Those that miss may fall.
What these trends suggest is that on the whole, EPS and revenue may be flat to slightly higher than estimates.
But remember, it's still early in the earnings season to draw conclusions.
With that said, I suspect results won't be as bad as we think.
This could lead to a nice uptrend in the broader market.
Matt Clark, CMSA®
Research Analyst, Money & Markets
Matt Clark is the research analyst for Money & Markets. He is a certified Capital Markets & Securities Analyst with the Corporate Finance Institute and a contributor to Seeking Alpha. Before joining Money & Markets, he was a journalist/editor for 25 years, covering college sports, business and politics.