What Q3 earnings show about recent economic trends

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I’m going to change things.

I usually share highly rated stocks in our powerful Stock Power Ratings system in this space.

But this earnings season was too big to ignore. I want to help you understand all this. Profit shows the profitability and financial stability of the company.

Every three months, investors pay attention to these company income statements.

I will do the same today.

I’ll tell you how the earnings stack up in the third quarter.

Then I’ll break down what this tells us about the near-term future of stocks.

Let’s get started.

Revenue and earnings trends for the third quarter

We’ve kicked off third quarter earnings season.

Below are the sectors in the S&P 500 that have reported results to date:

Of the companies that reported, 72% beat earnings per share (EPS) estimates.

On average for five years — 77%.

Fewer companies are beating their earnings forecasts.

The consumer discretionary industry led the decline, with nearly half reporting earnings below expectations.

The earnings growth rate for companies already reporting, plus estimates for companies that have yet to report, is just 1.5% for the quarter.

This is significantly lower than the forecast for the end of September.

This is slightly better news from a revenue perspective:

  • Seventy percent of the companies that reported exceeded their revenue forecasts. This is largely in line with the five-year average.
  • The company reported that earnings beat estimates by 1.3%, which means below than the five-year average.

Overall, this means that companies are still making money.

Just not so much doing as just like in the past.

What can we learn from these trends?

If the 1.5% earnings growth rate holds, it will be the slowest performance by S&P 500 companies since the third quarter of 2020.

FactSet reports that seven of the 11 sectors in the S&P 500 forecast a year-over-year decline in earnings.

Revenue is another story.

The current rate of revenue growth for S&P 500 companies is 8.5%.

If that holds, it will be the first time quarterly revenue growth has fallen below 10% since the fourth quarter of 2020.

The good news is that all 11 major market sectors reported (or forecast) earnings growth this quarter.

However, there are a few things to consider:

  • Energy companies will change EPS and revenue forecasts. Energy companies’ EPS growth in the third quarter of 2021 was 1,198%, and revenue growth was 75.7%. These are great strides, but the larger question is: Will they hold?
  • Tech earnings and earnings are not looking good. Forecasts are not good for tech companies. Technology revenue and revenue growth started strong in the second quarter, but faded. In the second quarter of 2021, earnings per share increased by almost 50%, and revenue growth was 22%. Remember, more than half of tech revenue depends on purchases outside the US, making them vulnerable to a stronger US dollar.
  • Dollar strength is a headwind. When a foreign currency is weaker against the US dollar, imports are more expensive. It hurts countries all over the world. Not buying as many American-made products because they are more expensive reduces the company’s profits.
  • The numbers for the third quarter of 2022 look average or even dismal. Because they compare to the third quarter of 2021, when EPS and revenue growth were huge. During the pandemic, analysts predicted lower growth, which caused a lot of shocks (as I showed you with energy above). Year-over-year comparisons are fine, but it’s better to compare these trends to the company’s past performance or to companies in the same sector.

The bottom line is that companies that beat earnings are, in most cases, growth.

Those who miss may fall.

These trends suggest that overall EPS and earnings may be in line with or slightly above estimates.

But remember, it’s too early in the earnings season to draw conclusions.

That being said, I suspect the results won’t be as bad as we think.

This could lead to a nice uptrend in the broader market.

safe trade,

Matt Clark, CMSA®
Research Analyst, Money and Markets

Matt Clarke is an analyst at Money & Markets. He is a Certified Capital Markets and Securities Analyst from the Institute of Corporate Finance and a member of In search of an alpha. Before joining Money & Markets, he spent 25 years as a reporter/editor covering college sports, business and politics.

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