As 3Q23 earnings season kicks off, investors may get another “better than feared” quarter.
projected y/y growth in S&P 500 3Q operating EPS
- Although macro risks loom large, investors ought not to lose sight of the fundamentals, which are shaping up to be more benign.
- Third quarter S&P 500 operating earnings per share are projected to come in at 8.8% y/y growth and a q/q decline of 0.1%.
- With analysts projecting 12% profit growth in 2024, perhaps investors should temper expectations for next year, as profits may face headwinds from a slowing economy.
Oil prices have been rising abruptly since hitting a recent low in June. Brent crude rose from $72 per barrel (pb) to the year-to-date high of $96.5pb in late September. It did correct to below $85pb, but the latest military conflict in the Middle East has triggered another spike in oil prices.
Despite many looming threats to the economy, 3Q23 earnings season should hopefully represent a relative bright spot in the landscape.
Fall has been fraught with risks to the U.S. economy and markets – impacts from the United Automobile Workers (UAW) union strike, volatile oil prices, the resumption of student loan payments, a potential government shutdown (again) and the unfolding conflict in the Middle East. Although these big macro risks loom large, investors ought not to lose sight of the fundamentals, which are shaping up to be more benign. As 3Q23 earnings season kicks off, investors may get another “better than feared” quarter.
Third quarter S&P 500 operating earnings per share (EPS) are projected to come in at $54.79, which would represent 8.8% year-over-year (y/y) growth and a quarter-over-quarter (q/q) decline of 0.1%. Most of the profit growth is expected to come from margins, contributing 7.3% percentage points (-pts). Margins began stabilizing earlier this year and are benefiting from gradually decelerating input and wage costs. Companies still appear to be exerting some degree of pricing power, although that should fade in the coming quarters. Revenue growth continues to slow, contributing an estimated 1.3%-pts to profit growth, as consumers tighten their belts and overseas revenues face headwinds from anemic economic growth in Europe and China. The divergence between margins and revenues is reflected in “surprises”, as revenue surprises continue to decline, while earnings surprises popped last quarter, likely linked to better margins. During the quarter, the dollar was up 3.2% and WTI oil rose 28.5%, presenting challenges for quarterly profit growth, but both were down y/y, helping the annual figures. Buybacks account for the remaining profit growth, contributing 0.2%-pts. Overall, stronger-than-expected economic activity in Q3 should be a sturdy buttress to profit growth for now.
Exhibit 1: Contributions to y/y operating EPS growth by sector
S&P 500, 3Q23
Source: FactSet, Standard & Poor's, J.P. Morgan Asset Management. Data reflect most recently available as of 11/10/23.
From a sector standpoint, energy should benefit on a quarterly basis from higher oil prices but is likely to contract y/y with oil lower than last year. Industrials face mounting headwinds in both airlines and transportation, as airlines face higher fuel costs and labor shortages despite solid demand, while transport faces waning demand. Similarly, financials face pressure from higher deposit betas, slowing loan growth and softening net interest income. On the consumer side, both staples and discretionary are likely to come off a boil as consumers spend less on “big-ticket” items and opt for lower cost options on goods and services. Within technology, prudent headcount and cost management should support margins, and hardware is showing signs of improvement. However, communication services is being confronted with plateauing subscriber growth, weak advertising revenues, and revenue loss from the writers’ strike. Finally, healthcare should see solid profit growth, with new products and rebounds in services boosting revenues, but capex and labor costs offsetting some of that strength.
Despite many looming threats to the economy, 3Q23 earnings season should hopefully represent a relative bright spot in the landscape. However, looking ahead, with analysts projecting a lofty 12% profit growth in 2024, perhaps investors should temper expectations for next year, when profits may face headwinds from a slowing economy.