As we exit the peak period of earnings season, we review the S&P 500 2023 Q1 earnings season in more detail, providing both aggregate and company-level insights using data from I/B/E/S, StarMine, and Datastream, which are all found in the desktop solution Refinitiv Workspace.
As highlighted in our 2023 Q1 Earnings Preview last month, analysts set the bar lower by aggressively downgrading estimates heading into earnings season. This paved the way for a resilient quarter with a strong earnings beat rate and an earnings surprise rate that reached a multi-quarter high.
Q1 saw a ‘semi-v’ shaped pattern in aggregate earnings over the last three months, which saw earnings growth reach a trough of -5.2% at the start of earnings season and has since dramatically improved to -0.7%. If the remaining companies report an aggregate earnings surprise of at least 5.6%, the Q1 growth rate will turn into positive territory. If this happens, it will be the first time since 2020 Q4 where the index went from a negative growth rate at the start of earnings season and ended in the green.
Part 1 – Earnings and Revenue Beat/Surprise Rate
Using data from the May 5th S&P 500 Earnings Scorecard, 84% of constituents have reported results (87% of aggregate earnings). Of the 419 constituents that have reported, 77.1% reported earnings above analyst expectations, which surpasses the prior four-quarter average of 73.5% and well-above the long-term average of 66.3%.
At a sector level, eight sectors posted an earnings beat rate above both its respective prior four-quarter average and long-term average (Financials, Real Estate, and Utilities did worse relative to their sector averages).
From a breadth perspective, we calculate the following datapoints (of the 419 constituents that have reported earnings):
- 63.2% of constituents reported both an earnings and revenue beat. This was led by Industrials, Health Care, and Information Technology.
- 9.5% of constituents reported both an earnings and revenue miss. This was led by Financials, Industrials, and Energy.
The aggregate earnings surprise factor (actual vs. mean estimate on day of reporting) of 7.2% reached a multi-quarter high and is well-above both the prior four-quarter average of 4.2% and long-term average of 4.1% (Exhibit 1). The largest contributors to the earnings surprise rate are as followed: JPMorgan Chase & Co, Microsoft Corp, Pfizer Inc, Apple Inc, Exxon Mobil Corp, Amazon.com Inc, Bank of America Corp, Ford Motor Co, General Motors Co, Moderna Inc, and Alphabet Inc.
The aggregate revenue surprise of 2.5% is also above both the prior four-quarter average of 2.3% and long-term average of 1.3%.
From a breadth perspective, we calculate the following datapoints (of the 419 constituents that have reported earnings):
- 39.6% of constituents reported an earnings surprise above 7.2%.
- 10.5% of constituents reported an earnings surprise below -7.2%.
- 40.1% of constituents reported a revenue surprise above 2.5%.
- 8.6% of constituents reported a revenue surprise below -2.5%.
Exhibit 1: S&P 500 Earnings Surprise Factor
Part 2 – Earnings and Revenue Growth/Contribution
From a year-over-year growth (y/y) perspective, 2023 Q1 earnings is currently $438.1 billion (-0.7% y/y, -0.4% q/q). This marks the second consecutive quarter of negative growth and is expected to continue into next quarter (2023 Q2: -4.7% y/y).
Y/Y growth has increased by 4.3 percentage points (ppt) since the start of earnings season, which is the largest intra-quarter improvement since 2022 Q1. Excluding energy, earnings growth is -2.4% y/y (Exhibit 2), which is the fourth consecutive quarter of negative ex. Energy growth. We’ve only seen this happen twice before – during the Global Financial Crisis of 2008-2009 and the COVID pandemic of 2020.
Exhibit 2: S&P 500 2023 Q1 Earnings Growth Rate
Exhibit 3 displays Q1 earnings growth in terms of earnings growth contribution, which provides a clearer way to understand which sectors were driving earnings growth this quarter.
Heading into the quarter, only four sectors were expected to deliver positive earnings growth contribution which was offset by Health Care and Information Technology – this can be seen in the blue bars.
The black bars (current values) show that all sectors except for Utilities delivered stronger earnings growth this quarter. Information Technology saw the largest relative increase, followed by Consumer Discretionary and Health Care.
Exhibit 3: S&P 500 Earnings Contribution
On an absolute basis, we also show a list of the individual companies that had the largest positive (negative) earnings growth contribution this quarter (Exhibit 4).
Exhibit 4: Earnings Growth Contribution by Individual Company
Looking at revenue, Q1 revenue is $3,635 billion (+3.5% y/y, -3.5% q/q). Y/Y growth has increased by 1.9 ppt since the start of earnings season. Excluding energy, revenue growth improves to 4.4% y/y.
Exhibit 5 is a replica of Exhibit 3 except we show current quarter revenue growth contribution. Every sector saw its relative revenue contribution increase this quarter, led by Health Care, Consumer Discretionary, and Utilities.
From a breadth perspective, we calculate the following datapoints (of the 419 constituents that have reported earnings):
- 48.2% of constituents reported an earnings growth rate above 5.0%.
- 35.3% of constituents reported an earnings growth rate below -5.0%.
- 53.7% of constituents reported a revenue growth rate above the current inflation rate.
- 19.1% of constituents reported a revenue growth rate below the current inflation rate.
Exhibit 5: S&P 500 Revenue Contribution
Part 3 – Net Profit Margin Expectations
Net profit margins peaked in 2021 Q2 (12.9%) and declined for six consecutive quarters to 10.7% last quarter.
The 2023 Q1 blended net profit margin (combining estimates and actuals) is currently forecasted at 11.1%, a slight tick-up from the 10.8% estimate at the start of earnings season (Exhibit 6).
Materials saw the largest increase in profit margin expectations this quarter (150 bps), followed by Information Technology (90 bps), and Consumer Discretionary (70 bps). Utilities was the only sector to see its margin decline vs. the start of earnings season (-330 bps).
At an Industry Group, Banks (180 bps) saw the largest increase this quarter, followed by Materials (150 bps), Automobile & Components (120 bps), Software & Services (120 bps), and Consumer Services (110 bps).
Utilities (-330 bps) saw the largest decrease this quarter, followed by Insurance (-130 bps), and Financial Services (-40 bps) (Exhibit 7).
Full-year 2023 expectations have remained stable since April at 11.2%, while the forward four-quarter margin has modestly improved by 10 bps to 11.3%.
From a breadth perspective, we calculate the following datapoints (of the 419 constituents that have reported earnings):
- 48.9% of constituents saw their net margin increase vs. the prior quarter.
- 13.1% of constituents saw their net margin increase for two consecutive quarters.
- 3.6% of constituents saw their net margin increase for three consecutive quarters.
- 50.6% of constituents saw their net margin decrease vs. the prior quarter.
- 26.0% of constituents saw their net margin decrease for two consecutive quarters.
- 11.2% of constituents saw their net margin decrease for three consecutive quarters.
- 4.1% of constituents saw their net margin decrease for four consecutive quarters.
Exhibit 6: S&P 500 Net Profit Margin
Exhibit 7: 2023 Q1 Net Profit Margin
Part 4 – Which companies have seen the largest revisions for next quarter?
Using the Screener app within Refinitiv Workspace for Analysts and Portfolio Managers, we can gain valuable insights to how analysts have reacted after a company releases its financial results. Exhibit 8 shows the 30-day percent change in the consensus mean EPS estimate for 23Q2 (i.e., the next upcoming quarter).
The first image is sorted by the largest downward earnings revisions for companies that have already posted results for the current earnings season period (column highlighted in blue). Said differently, we can see how analysts have revised estimates for the following quarter once a company reported results. Note: values less than -100% occur when an EPS estimate turns from positive to negative.
The second image is sorted by the largest upward earnings revisions.
Exhibit 8.1: 23Q2 30-day Revisions (Negative)
Source: Refinitiv Workspace
Exhibit 8.2: 23Q2 30-day Revisions (Positive)
Source: Refinitiv Workspace
We also add additional columns of data for further insight – the first column shows the StarMine Analyst Revision Model (ARM) score. ARM is a stock ranking model designed to show current analyst sentiment and predict future analyst revisions by looking at estimate revisions across EPS, EBITDA, Revenue, and Recommendations over multiple time periods. We note a strong correlation between the 30-day percent change revision in consensus EPS vs. ARM score (i.e., companies that have seen their consensus EPS rise (or fall) significantly are typically associated with a high (low) ARM score.
The next two columns show the number of analysts who have upgraded or downgraded EPS estimates for the next upcoming quarter. Finally, we display the expected report date for next quarter along with the StarMine Predicted Surprise (PS). The PS is a powerful quantitative analytic that compares the StarMine SmartEstimate to the consensus mean. The SmartEstimate places a higher weight on analysts who are more accurate and timelier, thus providing a refined view into consensus. Comparing the SmartEstimate to the mean estimate leads to our PS, which accurately predicts the direction of earnings surprise 70% of the time when the PS is greater than 2% of less than -2%.
The screener app provides a powerful workflow tool for Analysts and Portfolio Managers looking to parse through hundreds of companies during earnings season to identify thematic trends.
Conclusion
Q1 saw a ‘semi-v’ shape pattern when looking at the path of aggregate earnings this quarter as analysts significantly downgraded expectations which set the bar lower and resulted in companies surprising to the upside.
Looking ahead to next quarter, guidance numbers have started off much more positively compared to last quarter. There have been 31 negative announcements for Q2 compared to 27 positive announcements, resulting in a negative/positive ratio of 1.3. For context, Q1 only saw 26 positive announcements in total.
Interestingly, the dramatic improvement in Q1 earnings growth has not translated throughout the rest of the year, as Q2, Q3, and Q4 growth expectations have all declined marginally since April. Perhaps analysts are adopting a ‘wait-and-see’ approach before revising estimates any further.
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