Earnings season kicks off this week and we preview the STOXX 600 2023 Q2 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.
Using data from the July 18th publication of the STOXX 600 Earnings Scorecard, 2023 Q2 earnings are forecasted at €128.4 billion (-9.2% y/y, -4.1% q/q) while revenue is forecasted at €1,358.2 billion (-6.2% y/y, -3.1% q/q).
Analysts have set the bar lower heading into earnings season by downgrading Q2 estimates by 3.7 percentage points (ppt) over the last three months. This compares to a long-term average decline of 0.4 ppt and a prior four-quarter average increase of 2.0 ppt. The decline in earnings expectations heading into earnings season marks a stark contrast to the prior nine quarters, where earnings expectations increased in eight of the nine quarters.
Part 1 – Earnings Growth Trajectory
Exhibit 1 highlights the Q2 y/y earnings growth rate in blue (-9.2%), along with ex-energy in black (+3.9%). We highlight the latter, as the ex-energy growth rate has been positive for the prior nine quarters. This is in sharp contrast to the S&P 500, who has seen its ex-energy earnings growth decline for four consecutive quarters (S&P 500 2023 Q2 Earnings Preview: A Repeat Performance?, July 11, 2023),
At a sector level, Utilities is forecasted to continue its streak of positive y/y earnings growth at seven consecutive quarters, while Financials is at three consecutive quarters. Telecommunications and Basic Materials are forecasted to post its fifth and fourth consecutive quarter of negative earnings growth respectively.
This year marks a period of ‘Tougher Comps Ahead’ as 2022 saw a record year for the STOXX 600 with €540.6 billion in aggregate earnings (note: figure is a summation of prior four quarters which only includes companies with quarterly data). This will result in tougher year-over-year comparisons over the coming quarters ahead. To put things in perspective, the Q2 aggregate earnings estimate of €128.4 billion is well above pre-pandemic levels and just below the prior four-quarter average of €137.1 billion.
Exhibit 1: STOXX 600 2023 Q2 Earnings Growth Rate
Part 2 – Earnings Growth Contribution
From an earnings growth contribution perspective, four sectors have positive earnings contribution while six sectors have negative earnings contribution (Exhibit 2).
Financials has the largest positive contribution of any sector and is forecasted to contribute 4.4 percentage points (ppt) towards the index growth rate of -9.2%. Technology (2.5 ppt) and Consumer Cyclicals (1.3 ppt) are the next largest contributors while Energy (-12.2 ppt), Basic Materials (-4.5 ppt), and Industrials (-0.7 ppt) are the largest detractors to earnings growth this quarter.
We point out that Energy is no longer the ‘top dog’ from an earnings growth contribution perspective, which has been the trend in recent quarters. Instead, the sector now faces more difficult year-over-year comparisons going forward given the banner year of 2022, where the sector recorded close to €131 billion in earnings (the S&P 500 Energy sector recorded close to $200 billion over the same period). Therefore, looking at quarterly growth rates will be more effective to gauge earnings performance this year. Energy is forecasted to post Q2 aggregate earnings of €17.2 billion, a 32.8% decline from Q1 (S&P 500 Energy is forecasted to post a decline of 20.0% over the same period)..
Exhibit 2: STOXX 600 2023 Q2 Earnings Contribution
Part 3 – Market Cap vs. Earnings Weights
Exhibit 3 looks at the difference between ‘market-cap’ and ‘share-weighted’ weights for the STOXX 600 sectors. The STOXX 600 Earnings Outlook utilizes a share-weighted methodology.
Financials has the largest earnings weight this quarter at 31.6%, which is 1.9 times greater than its market-cap weight of 16.8%. This results in the largest weight differential of all sectors, yet the sector trades at a significant discount with a forward P/E of 7.7x (38% discount vs. STOXX 600).
Energy has a 6.0% market cap weight in the STOXX 600, yet it’s expected to deliver almost a fifth of earnings this quarter. Energy has an earnings share-weight of 13.6%, creating the second largest weight differential between share-weight and market-cap weight (7.6 ppt). The sector trades at an even further discount to the overall index with a forward P/E of 6.9x.
Conversely, Consumer Non-Cyclicals has a market-cap weight of 11.8% compared to an earnings weight of 1.9%, which is the largest negative differential (-9.9 ppt).
Exhibit 3: Market Cap vs. Share-Weight for STOXX 600 Sectors
Part 4 – Which companies have seen the largest revisions heading into earnings season?
Using the Screener app in Refinitiv Workspace, we can screen for yet-to-report constituents that have seen the largest upgrades and downgrades heading into earnings season.
Exhibit 4 highlights companies who have seen earnings downgrades of at least 30% as defined by the 60-day mean estimate change in ‘EQ1 Preferred Earnings’. Preferred Earnings is defined as EPS for most companies except for Real Estate where it can be either EPS or FFOPS depending on analyst coverage.
Siemens Energy AG has seen the largest downgrade in EPS estimates over the last 60 days (-407.6%) followed by OCI NV (-105.1%), Rheinmetall AG (-47.0%), Wacker Chemie AG (-29.3%), and Repsol SA (-28.0%). Note: values less than -100% occur when an EPS estimate turns from positive to negative.
Exhibit 4: Largest Negative Revision for 2023 Q2
Source: Refinitiv Workspace
Exhibit 4 also displays the Predicted Surprise (PS) for each constituent, which compares the SmartEstimate vs. Mean Estimate. A PS greater than 2% or less than -2% is deemed significant as our research shows that StarMine will accurately predict the direction of the earnings surprise 70% of the time.
The StarMine SmartEstimate is a quantitative analytic which is used as an input to many of the StarMine models. The SmartEstimate places a greater weight on higher ranked analysts who are more accurate and timelier.
We see a positive correlation between constituents who have seen a large downgrade and a corresponding negative PS. Furthermore, a positive correlation is shown between the mean estimate change vs. Analyst Revision Model (ARM) score (i.e., companies that have seen large downward earnings revision also have a low ARM score).
ARM is a percentile stock ranking model that is designed to predict future changes in analyst sentiment by looking at changes in estimates across EPS, EBITDA, Revenue, and Recommendations over multiple time periods. The last two columns display both the current ARM score and its 30-day change.
Looking at the Predicted Surprise and ARM columns can be very useful during earnings season to assess the likelihood of whether companies are expected to beat or miss earnings while at the same time gauging analyst sentiment.
Exhibit 4.1 displays the same data for constituents with the largest upgrades heading into earnings season.
Exhibit 4.1: Largest Positive Revisions for 2023 Q2
Source: Refinitiv Workspace
Part 5 – Net Profit Margin Expectations
The forward 12-month net profit margin for the STOXX 600 is currently 9.9%, down from its all-time high of 10.1% in November 2022 according to Refinitiv Datastream and has declined by 10 basis points (bps) over the last year (Exhibit 5).
Four sectors (Financials, Health Care, Technology, and Utilities) have seen its margin expectations rise compared to seven sectors seeing a decline. Financials (+200 bps) has seen the largest increase in margin expectations followed by Information Technology (+140 bps), and Health Care (20 bps).
Basic Materials has seen the largest decline in margin expectations (-270 bps), followed by Energy (-70 bps), and Industrials (-60 bps).
Exhibit 5: STOXX 600 Net Profit Margin
Part 6 – Forward P/E & PEG Ratio
Using Refinitiv Datastream, the forward 12-month (F12) EPS peaked in June 2022 ($37.53 per share) and has since declined by 0.7% to $37.25 (Exhibit 6). However, it is important to note that the F12 EPS estimate continues to have a larger weighting towards the 2024 estimate as each day passes.
The 2023 and 2024 estimate has increased by 0.3% and 1.3% respectively since June 2022. In comparison, the STOXX 600 has risen by approximately 5% over the same period.
The STOXX 600 forward 12-month P/E ratio is 12.3x, which ranks in the 25th percentile (since 1999) and a 15.2% discount to its 10-year average (14.5x). For reference, the trough forward P/E during the last three recessions were as followed: 6.8x (Oct 2008). 8.8x (Nov 2011), and 10.3x (Mar 2020)
Furthermore, the STOXX 600 ‘PEG’ ratio is currently 1.24x which ranks in the 27th percentile (since 1999) and a 15.6% premium to its 10-year average (1.47x).
Exhibit 6: STOXX 600 EPS Estimates
Conclusion
Q2 estimates have declined heading into earnings season – something we have not seen in the last nine quarters, which may set a lower bar for corporations to beat analyst expectations and surprise to the upside. The quality of a beat will matter, as investors look to hear from company management on numerous themes including the macro-outlook, health of the consumer, impact of higher input costs on margins, employee hiring (or layoffs), capital expenditure plans, and artificial intelligence.
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