Equities, Earnings, Markets Earnings season: How much is already priced in?

While earnings season is always a mixed bag, we would characterize the results as favorable, highlighted by resilient consumer spending across a range of industries including travel, restaurants, and new home construction. In addition, there are signs that previously weak areas are stabilizing or improving such as PCs, digital advertising, cloud, and more niche markets such as life science tools. Not surprisingly, it seems like every company is talking about opportunities in AI.

Most encouragingly, forward guidance has been better than expected. The bottom-up 3Q S&P 500 EPS consensus estimate is holding up better than normal, bucking the usual pattern whereby companies lower expectations at the beginning of the quarter, only to beat those estimates when the results are announced. The bottom-up, next-12-months EPS estimate has also ticked higher. Lastly, the percentage of companies beating sales and earnings estimates has improved over the past week.

With over half of the S&P 500 market cap having now reported, 73% of companies are beating estimates by 4.5% in aggregate, consistent with normal patterns. Profits are on track to decline 3–5% (excluding a one-time, noncash charge from Merck), in line with our expectations going into earnings season. We now have greater conviction in our view that 2Q should mark the bottom in year-over-year earnings growth. The pressure on profit margins (which was most prominent in 2022) also seems to be easing, and companies are guiding for a step-up in margins in 3Q. Lower inflation has led to a slowdown in revenue growth, but cost pressures are also easing.

With the worst of the earnings declines behind us and earnings poised to start growing, this is a supportive backdrop for stocks. But we question how much of this is already priced in. The S&P 500 forward P/E was already extended when earnings season began and now sits around 19.5x. Usually, when valuations are at these levels, expected earnings growth is well into the double-digits.

This week, another 30% of the S&P 500 market cap will report, including Apple and Amazon. In the following weeks, we'll hear from the vast majority of retailers who will be able to shed more light on the state of the consumer. Our S&P 500 EPS estimates and price targets remain unchanged. We expect earnings to fall 2.5% (USD 215) in 2023 and grow 9.5% (USD 235) in 2024. Our June 2024 price target is 4,400.

Main contributors: David Lefkowitz, Nadia Lovell, Matthew Tormey

Original report: S&P 500 EPS: A better tone , 28 July, 2023.

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