As we exit the peak period of earnings season, we review the S&P 500 2023 Q3 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 LSEG Workspace.
Earnings Commentary
Q3 saw minimal revisions heading into earnings season compared to the prior six quarters were analysts downgraded growth expectations heading into earnings season. This setup a slightly more challenging environment for companies to beat expectations.
Yet we continue to see resiliency in the earnings outlook for the S&P 500, as Q3 delivered another strong quarter marked by:
- Y/Y earnings growth of +6.3% (highest since 2022 Q2).
- Y/Y earnings ex-energy growth of +11.6% (highest since 2021 Q4).
- Q/Q earnings growth of +7.8% (highest since 2021 Q1).
- Earnings beat rate of 81.3% (highest since 2021 Q2).
- Earnings surprise rate of +7.1% (2nd highest since 2021 Q3).
- Blended aggregate earnings of $487.1 billion (an all-time high).
Q3 earnings growth improved by 500 basis points during the quarter, marked by strong results from the Magnificent-7 (excluding Tesla Inc) and financial juggernauts JPMorgan Chase & Co and Berkshire Hathaway Inc. For reference, Q2 saw earnings growth improve by 290 bps while Q1 saw an improvement of 510 bps which highlights the resiliency noted above.
However, we continue to see companies reporting revenue results which are lower than analyst expectations. Q3 saw a revenue beat rate of 59.6% and a revenue surprise rate of 0.7%, both being the lowest since 2020 Q1. Revenue growth of +1.4% y/y is the second lowest since 2020 Q4 with the prior quarter showing the weakest growth over this period. We caveat this weak growth by mentioning that the index reached a high watermark in aggregate revenue during Q2 and Q3 of 2022.
Perhaps the most interesting takeaway is that even with a strong Q3 earnings season (on the earnings side), this did not translate into upward revisions for Q4. Instead, Q4 earnings growth expectations have been revised downwards for six consecutive weeks by 520 bps over this period. Health Care, Materials, and Consumer Discretionary have seen the largest downward revisions so far.
Part 1 – Earnings and Revenue Beat/Surprise Rate
Using data from the November 10th S&P 500 Earnings Scorecard, 91.0% of companies have reported results. Of the 455 companies that have reported, 81.3% reported earnings above analyst expectations, which surpasses the prior four-quarter average of 73.6% and well-above the long-term average of 66.5%. Furthermore, Q3 has the highest earnings surprise rate since 2021 Q2 as shown in Exhibit 1.
At a sector level, ten sectors posted an earnings beat rate above its prior four-quarter average (Energy was in-line relative to its sector average).
From a breadth perspective, we calculate the following datapoints (of the 455 companies that have reported earnings):
- 53.0% of constituents reported both an earnings and revenue beat. This was led by Communication Services, Consumer Discretionary, and Information Technology.
- 9.7% of constituents reported both an earnings and revenue miss. This was led by Utilities, Real Estate, and Energy.
The aggregate earnings surprise factor (actual vs. mean estimate on day of reporting) of 7.1% is well-above both the prior four-quarter average of 4.8% and long-term average of 4.1%. The largest contributors to the earnings surprise rate are as followed: Amazon.com Inc, Microsoft Corp, Meta Platforms Inc, JPMorgan Chase & Co, and Apple Inc. This group contributed roughly one-third of the overall earnings surprise this quarter.
The aggregate revenue surprise of 0.7% is below the prior four-quarter average of 1.9% and below the long-term average of 1.3%. The revenue surprise rate is the lowest since 2020 Q1.
From a breadth perspective, we calculate the following datapoints (of the 455 companies that have reported earnings):
- 40.2% of constituents reported an earnings surprise above 7.1%.
- 5.3% of constituents reported an earnings surprise below -7.1%.
- 45.2% of constituents reported a revenue surprise above 0.7%.
- 26.8% of constituents reported a revenue surprise below -0.7%.
Exhibit 1: S&P 500 Earnings Beat Rate
Part 2 – Earnings and Revenue Growth/Contribution
Q3 blended earnings is currently $487.1 billion (+6.3% y/y, +7.8% q/q). This marks the third consecutive quarter of positive q/q growth and the highest since 2021 Q3.
Q3 saw a stable bottom-up EPS estimate heading into earnings season (Exhibit 2), which saw analysts lower the bar moderately heading into earnings season with a starting growth rate of +1.3% and has since improved by 500 basis points to +6.3%.
The intra-quarter improvement in earnings growth of 500 bps is much higher than the prior-four quarter average of 160 bps and above the long-term average of 310 bps. Excluding energy, earnings growth is +11.6% y/y, which is the second consecutive quarter of positive ex-energy growth.
Exhibit 2: S&P 500 2023 Q3 Bottom-Up EPS
Exhibit 3 displays Q3 earnings growth in terms of earnings growth contribution, which provides a clearer way to understand which sectors were driving earnings growth.
Heading into the quarter, seven sectors were expected to deliver positive earnings growth contribution while Real Estate, Materials, Health Care, and Energy were expected to deliver negative earnings growth contribution – this can be seen in the blue bars.
The black bars (current values) show that nine sectors delivered stronger earnings growth compared to the start of earnings season. Financials saw the largest relative increase, followed by Consumer Discretionary and Information Technology. Health Care saw the largest relative decrease this quarter.
Exhibit 3: S&P 500 Earnings Growth 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, Q3 revenue is $3,795.8 billion (+1.4% y/y, +2.4% q/q). Y/Y growth has increased by approximately 60 basis points since the start of earnings season. Excluding energy, revenue growth improves to +3.7% y/y.
Exhibit 5 is a replica of Exhibit 3 except we show current quarter revenue growth contribution. Eight sectors saw its relative revenue growth contribution increase this quarter, led by Health Care, Energy, and Information Technology.
From a breadth perspective, we calculate the following datapoints (of the 455 companies that have reported earnings):
- 51.6% of constituents reported an earnings growth rate above 5.0%.
- 28.8% of constituents reported an earnings growth rate below -5.0%.
- 47.1% of constituents reported a revenue growth rate above 5.0%.
- 26.3% of constituents reported a revenue growth rate below -5.0%.
Exhibit 5: S&P 500 Revenue Growth Contribution
Part 3 – Net Profit Margin Expectations
Net profit margins peaked in 2021 Q2 (12.9%) and then declined for six consecutive quarters to 10.7%.
The Q3 blended net profit margin (combining estimates and actuals) is 11.9%, a moderate increase of 70 bps from the prior quarter (Exhibit 6).
Financials saw the largest increase in profit margin expectations this quarter (213 bps, current net margin: 20.1%), followed by Real Estate (162 bps, 17.8%), and Information Technology (143 bps, 24.6%). Health Care saw the largest decline (-72 bps, 8.1%).
At an Industry Group level (Exhibit 7), Consumer Services (602 bps) saw the largest increase this quarter, followed by Utilities (331 bps), and Insurance (300 bps). Equity Real Estate Investment Trusts (-295 bps) saw the largest decline this quarter, followed by Transportation (-283 bps), and Materials (-165 bps).
From a breadth perspective, we calculate the following datapoints (of the 455 constituents that have reported earnings):
- 62.9% of constituents saw their net margin increase vs. the prior quarter.
- 36.9% of constituents saw their net margin increase for two consecutive quarters.
- 13.6% of constituents saw their net margin increase for three consecutive quarters.
- 36.5% of constituents saw their net margin decrease vs. the prior quarter.
- 13.0% of constituents saw their net margin decrease for two consecutive quarters.
- 5.5% of constituents saw their net margin decrease for three consecutive quarters.
Exhibit 6: S&P 500 Net Profit Margin
Exhibit 7: 2023 Q3 Net Profit Margin (Industry Group)
Part 4 – Which companies have seen the largest revisions for next quarter?
Using the Screener app within LSEG 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 23Q4 (i.e., the next upcoming quarter).
Exhibit 8.1 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.
Exhibit 8.2 is sorted by the largest upward earnings revisions.
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.
Exhibit 8.1: 30-day Revision (Negative) for upcoming quarter
Source: LSEG Workspace
Exhibit 8.2: 30-day Revision (Positive) for upcoming quarter
Source: LSEG Workspace
Conclusion
Q3 saw another resilient quarter on the earnings front, which saw a multi-quarter high in the earnings beat rate.
Looking ahead to next quarter, Q4 guidance numbers have started off more negatively compared to last quarter. There have been 50 negative announcements compared to 25 positive announcements, resulting in a negative/positive ratio of 2.0.
We continue to see fewer companies beat revenue expectations (as was the case last quarter) which will be a concern given the debate around pricing power and how long that will last post-pandemic. Furthermore, real revenue growth (adjusted for inflation) was negative for the fourth consecutive quarter.
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