First-quarter earnings season results have been largely in line with our expectations. While it's still early—only 20% of the S&P 500 market cap has reported—results are coming in a bit better than the last few quarters. At the aggregate level, about 60% of companies are beating sales and 70% are beating earnings estimates, a bit below their longer-term averages. However, excluding financials—which has its own unique challenges, and the sector accounts for a large portion of the reports so far—more than 80% of companies are beating on earnings, which is near the upper end of the range since 2015. In aggregate, earnings are beating by 4.5%, in line with our view for an earnings beat of 3–5% and our expectation for a 1–3% year-over-year decline in S&P 500 EPS for the quarter. Finally, for those that have already reported, second-quarter EPS for the median company is only down fractionally, an improvement from the last two reporting seasons.
Deposit flows have been mostly negative, and deposits are shifting out of non interest-bearing into interest- bearing accounts—especially for the regional banks—which has dampened net interest margins. Large-cap banks generally saw deposit inflows driven by a "flight to safety." On credit, normalization trends continue to be in line with expectations, and credit quality remains good with only a modest deterioration in delinquencies and net charge-offs. However, several banks increased loan-loss provision expense driven by increased recession odds and loan growth. Lastly, while every bank has reported capital ratios well above regulatory minimums, some smaller banks decided to suspend share buybacks given a more cautious outlook.
Outside of financials, there are increased signs of weakness within tech hardware. Taiwan Semi noted a deeper downturn in its business in 1H23 (due to smartphones and PCs) but expectations for a bottom in 2Q. Comments from tech hardware wholesalers were also cautious. Still, the banks highlighted that consumer spending remains healthy, and American Express called out robust trends in travel and entertainment. And the US housing market's spring selling season is off to a good start. New orders for homebuilder D.R. Horton were better than expected.
Next week, earnings season will kick into full gear as 180 companies representing close to 45% of the S&P 500 market cap are set to report. Our view is that earnings season may not be a negative catalyst for the market, but with the S&P 500 forward P/E above 18x, the scope for upside appears limited. We expect equities to be range-bound in the near term as the market oscillates between the soft-landing and recession narratives. Later in the year, the lagged effects of Fed rate hikes should start to become more pronounced, putting further pressure on the economy and corporate profits. Expectations for 5% growth in S&P 500 EPS in 2H look aggressive. Our June and December S&P 500 targets are 3,900 and 3,800, respectively.
Main contributors - David Lefkowitz, Nadia Lovell, Matthew Tormey
Content is a product of the Chief Investment Office (CIO).
Original report - Earnings season: A better start vs. recent quarters, 21 April 2023.
