Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:


  • The picture emerging from the 2022 Q3 earnings season continues to run counter to pre-season fears of an impending earnings cliff. Overall corporate profitability isn’t great, but it isn’t bad either. That said, estimates for the coming periods are steadily coming down, with the revisions trend accelerating in recent days.


  • Looking at 2022 Q3 as a whole, total S&P 500 earnings are currently expected to be up +2.0% from the same period last year on +10.7% higher revenues. Excluding contributions from the Energy sector, Q3 earnings for the rest of the index would be -5.6% below the year-earlier level.


  • Looking at the calendar-year picture, total S&P 500 earnings are expected to be up +5.7% in 2022 and +3.8% in 2023. On an ex-Energy basis, total 2022 index earnings would be down -1.2% (instead of +5.7%, with Energy).


  • The widely held view that earnings estimates remain out of sync with the economic ground reality is erroneous as it looks at the aggregate picture at the index level where estimates for the Energy sector have consistently been positive.

The focus lately has been on the disappointing results from the Tech sector, particularly the mega-cap operators Amazon AMZN, Alphabet GOOGL, Meta META, Microsoft MSFT and Apple AAPL; we have been referring to this group as the ‘Big 5 Tech Players’.

Of this group, Apple has fared a lot better, burnishing its leadership credentials and its ‘Rock of Gibraltar’ status in the eyes of its legion of supporters. That said, these results have forced us all to revisit our long-held assumptions about the sustainability of these technology leaders’ earnings power.

The market’s immediate concerns appear to be centered on the outlook for Amazon and Meta, as Alphabet and Microsoft results weren’t really that bad. Some of that differentiation was clear from the stock market reaction to the results as well, with Amazon and Meta shares really getting punished following their quarterly reports.

You can see some of this clearly in the chart below that shows the quarter-to-date performance of this group of stocks relative to the S&P 500 index.

Zacks Investment Research
Image Source: Zacks Investment Research

The one thing that is becoming clear after results from these ‘Big 5 Tech Players’ is that none of these players’ profitability is Teflon coated and immune from cyclical forces. Apple may be looking invincible in the afterglow of its quarterly report, but the consumer decision to purchase the company’s pricey phones and other devices remains a discretionary choice and vulnerable to economic forces.

Q3 earnings for the ‘Big 5 Tech Players’ in the aggregate are down -15.2% from the same period last year on +9.4% higher revenues, as the chart below shows.

Zacks Investment Research
Image Source: Zacks Investment Research

For 2022 as a whole, the group is expected to bring in -13.6% lower earnings on +5.5% higher revenues. But growth is expected to resume next year and accelerate the following year, as you can see in the chart below that shows the group’s earnings and revenue growth picture on an annual basis.

Zacks Investment Research
Image Source: Zacks Investment Research

A big driver of the group’s current growth challenge is the all-around margin pressures, a function of their bulging payrolls, particularly for Amazon, Meta and Alphabet. Many in the market have been suspecting for some time now that these companies are significantly over-staffed, with Amazon even acknowledging the reality. One could say that if they move into the management mode of other blue chip operators by getting on top of their expenses, they can help strengthen their profitability.

Amazon hired a ton of workers during Covid to meet the surging demand as all of us stopped going to stores. The question now is whether they need to let some of those workers go as Covid restrictions are mostly in the rear-view mirror.

In addition to the group’s margin challenge, there are two other factors that will drive their profitability over the next two years.

The first factor is the unusual impact of Covid on their profitability in the last two years. You can see some of that from the 2021 growth figures in the above chart. The chart below shows the aggregate dollar earnings and revenues for the group in the last 6 years and estimates for the next two years.

Zacks Investment Research
Image Source: Zacks Investment Research

You can see the unusually large gain in 2021 on account of the pandemic. The question now is whether the +58% jump in 2021 earnings brought forward profits from 2022 only or 2022 and 2023?

The second factor is related to the impact of macroeconomic forces on these companies’ profitability. Microsoft’s business was affected not only by the slump in PC demand, a function of post-Covid adjustment, but also by growth deceleration in the cloud business.

We saw similar cloud-centric challenges in the Amazon and Alphabet reports as well. This cloud deceleration is likely a reflection of companies cutting back on enterprise spending, on top of reining in digital advertising spending.

The market was under the impression that cloud spending was effectively immune from economic forces and will not experience any cuts. The numbers from Microsoft, Amazon, Alphabet and others show otherwise.

This brings us back to evaluating the seemingly Teflon-coated status of Apple’s gadgets and services.

I am of the opinion that once the Fed’s tighter policy regime produces cracks in the labor market, we will end up discovering that consumers rationally deferred replacing their older devices with newer ones. We are not there yet because the labor market is still rock solid, but we could very well reach that stage at either of the coming two quarterly reports.

The Estimate Revisions Trend

Analysts have been steadily cutting their estimates for some time now. We saw this in the run up to the start of the Q3 earnings season and the trend continues with respect to estimates for the current period (2022 Q4) and full-year 2023.

The charts below show how earnings growth expectations for the 2022 Q4, as a whole and on an ex-Energy basis, have evolved in recent weeks.

Zacks Investment Research
Image Source: Zacks Investment Research

The chart below shows how the expected aggregate total earnings for full-year 2023 have evolved on an ex-Energy basis.

Zacks Investment Research
Image Source: Zacks Investment Research

As you have consistently been pointing out, aggregate S&P 500 earnings outside of the Energy sector peaked in mid-April and have been steadily trending down ever since. In fact, S&P 500 earnings estimates in the aggregate outside of the Energy sector have declined -9.9% since mid-April, with double-digit percentage declines in Retail, Construction, Consumer Discretionary, Tech, Industrial Products and the Aerospace sectors. On the whole, estimates are down for 13 of the 16 Zacks sectors. 

The Overall Earnings Picture

The chart below that provides a big-picture view of earnings on a quarterly basis.

Zacks Investment Research
Image Source: Zacks Investment Research

The chart below shows the overall earnings picture on an annual basis, with the growth momentum expected to continue.

Zacks Investment Research
Image Source: Zacks Investment Research

Please note that a big part of this year’s growth is thanks to the strong momentum in the Energy sector whose earnings are on track to grow +142.6%. Excluding this extraordinary Energy sector contribution, earnings growth for the rest of the index would be down -1.3%. This relatively flat earnings picture for this year is also in-line with the economic ground reality.

Earnings next year are expected to be up only +3.8% as a whole and +5.6% excluding the Energy sector. This magnitude of growth can hardly be called out-of-sync with a flat or even modestly down economic growth outlook. Don’t forget that headline GDP growth numbers are in real or inflation-adjusted terms while S&P 500 earnings discussed here are not.

As mentioned earlier, 2023 aggregate earnings estimates on an ex-Energy basis are already down -9.9% since mid-April. Perhaps we see a bit more downward adjustments to estimates over the coming weeks, after we have seen Q3 results. But we have nevertheless already covered some ground in taking estimates to a fair or appropriate level.

This is particularly so if whatever economic downturn lies ahead proves to be more of the garden variety rather than the last two such events. Recency bias forces us to use the last two economic downturns, which were also among the nastiest in recent history, as our reference points. But we need to be cautious against that natural tendency as the economy’s foundations at present remain unusually strong.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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