TGT - Q3 Earnings: Recession Might End For Corporations But Stronger Results May Not Aid Market Much | Benzinga
A U.S. economic recession may or may not be in the cards going into 2023’s final quarter, but at least the "earnings recession” could be running out of steam.
The approaching third-quarter earnings season has a chance of being the first in a year to show rising profitability for S&P 500® companies. However, that won’t necessarily be enough to awaken stocks from their late-summer slumber. During the last three quarters, average S&P 500 earnings growth declined year over year, fitting the definition of an "earnings recession”—at least two quarters of year-over-year earnings declines—for the first time since the pandemic.
Strong consumer spending and easier year-over-year earnings comparisons for some key sectors could help the biggest 500 U.S. corporations get over the hump when earnings season begins in mid-October. Eight of the 11 S&P 500 sectors are expected to report year-over-year earnings growth in Q3, according to research firm FactSet, led by communication services and consumer discretionary firms.
Tough comparisons to the solid post-pandemic economy and rising interest rates clipped earnings growth for most S&P 500 sectors in late 2022 and the first half of 2023. Energy, which led earnings gainers in 2022 as crude oil prices rose following Russia’s invasion of Ukraine, helped bring overall earnings down earlier this year as crude prices fell. Crude has marched higher lately, however.
Analysts expect Q3 earnings to drop 0.1% from a year earlier before expected solid gains in Q4 and next year, FactSet said in its most recent Earnings Insight report last Friday. (The firm issues a new estimate each Friday ahead of and during earnings season, so this could change.) Analysts anticipate Q4 earnings growth of 8.3%, followed by 12.2% calendar-year growth in 2024. That compares with expected calendar-year growth of just 1.1% this year, FactSet said. Earnings fell 4.1% in Q2 of this year.
Anticipated improvement in bottom-line performance won’t necessarily light a fire under Wall Street, in part because stocks approach earnings at relatively high valuations compared with the historic average. Also, recent slower revenue growth has some analysts worried about company margins. Rising interest rates and inflation from soaring energy costs are other wild cards that could prevent stronger earnings growth from ending Wall Street’s extended summer dog days.
Earnings could turn corner even as Wall Street rally cools
Ironically, falling earnings earlier this year went hand in hand with a rallying stock market. The S&P 500 index (SPX) is up about 10% year to date as of early this week, mainly reflecting gains by the biggest mega-cap stocks amid excitement over artificial intelligence.
When the SPX goes up and earnings go down, it raises the market’s valuation, which in turn can dampen investor enthusiasm. The SPX’s forward price-to-earnings ratio (P/E) reached approximately 20 at its summer peak after starting the year near 17. It’s down slightly now at just under 18 and below the five-year P/E average. But it remains above the 10-year average of 17.5 and arguably has built in the anticipated improved earnings over the next year.
Another factor working against potential future market gains is the other side of the earnings equation: top-line growth, or revenue. Analysts expect revenue to grow for S&P 500 companies in Q3 but by just 1.6% and up just slightly ...