CIO's S&P 500 price targets for June and December 2023 are 3,700 and 4,000, respectively. (UBS)

Consumer demand remains strong, but the shift from goods to services spending continues. Pricing power has been resilient. US dollar strength has crimped EPS growth by a few percentage points. Lastly, mega-cap tech earnings were disappointing with slowdowns in cloud, digital advertising, and e-commerce.

Revenue growth is coming in quite strong and is on pace to exceed 10%. As previously mentioned, strong consumer demand and companies’ ability to raise prices are driving the bulk of the contribution. Still, after surging in the recovery from the pandemic, profit margins are now declining to pre-pandemic levels as costs rise faster than revenues. If we start to see a meaningful slowdown in revenue growth, margins would be at further risk.

Turning to the numbers, 64% of companies are beating earnings estimates by 1% in aggregate. Both of these numbers are lower than the five-year average of 75% and 8%, respectively. This is a little concerning considering that "the bar" was quite low for this earnings season because estimates were aggressively revised lower before reporting season. Finally, corporate profits are on track to grow by 3%, in line with the lower end of our initial expectations.

We reiterate our view that EPS will likely decline next year. In our view, the 2023 bottom-up consensus estimate remains too optimistic. We expect the current estimate of USD 233 to move lower driven by tighter financial conditions, a modest rise in the unemployment rate, and a continued decline in the ISM Manufacturing index. Our S&P 500 EPS estimates are USD 225 (+7% y/y) in 2022 and USD 215 (–4% y/y) in 2023. Our S&P 500 price targets for June and December 2023 are 3,700 and 4,000, respectively. If the economy enters a full-blown recession—the odds of which have increased after the Federal Reserve indicated that it will hike rates even further—the S&P 500 could fall to the 3,300 range.

Main contributors: David Lefkowitz, Nadia Lovell, Matthew Tormey

Content is a product of the Chief Investment Office (CIO).

Original report - Continued lackluster S&P 500 EPS results, 4 November, 2022.