​​Q3 earnings season preview – solid growth expected despite ongoing inflation worries​

​​​Earnings season – what does Wall Street expect?

​For the upcoming earnings season, analysts are forecasting year-over-year earnings growth of 8% for the fourth quarter (Q4) of 2023. For the full year of 2023, earnings growth is projected to be 1%, and for 2024, analysts are calling for a substantial year-over-year earnings growth of 12.2%.

Earnings outlook improves

​The earnings outlook for the S&P 500 in the Q3 appears to be slightly more positive compared to recent quarters. While the number of companies issuing negative earnings guidance is in line with the 10-year average, analysts have not lowered their earnings estimates by as much as they typically do at this stage. This suggests that the expected decline in earnings for the Q3 will be the smallest during the four-quarter streak of declines.

Estimate revisions cut by smaller amount

​When it comes to estimate revisions, analysts have lowered earnings estimates for Q3 2023 by a smaller margin compared to the average. The estimated earnings per share for the Q3, according to FactSet, have decreased by only 0.2% since June 30, which is lower than both the 5-year and 10-year averages. Overall, the S&P 500 is expected to report a year-over-year decline in earnings of -0.2% for the Q3, marking the fourth consecutive quarter of decline but with the smallest decrease during this period.

Among the eleven sectors, eight are projected to report year-over-year earnings growth, with the Communication Services and Consumer Discretionary sectors leading the way. On the other hand, the Energy and Materials sectors are expected to experience a decline in earnings.

Consumer discretionary and real estate to lead revenue growth

​In terms of revenues, the S&P 500 is anticipated to report year-over-year revenue growth of 1.5% for the Q3, based on data from FactSet. If this holds true, it will mark the 11th consecutive quarter of revenue growth for the index. The Consumer Discretionary and Real Estate sectors are expected to lead in revenue growth, while the Energy and Materials sectors are predicted to see a decline.

Guidance in line with 10-year average

​In terms of guidance, the percentage of S&P 500 companies issuing negative earnings per share (EPS) guidance for Q3 2023 is equal to the 10-year average. Out of the 116 companies that have provided EPS guidance for this period, 74 have issued negative guidance, while 42 have issued positive guidance.

Although the percentage of companies with negative guidance is slightly above the 5-year average, it aligns with the 10-year average.

S&P 500 valuation drops compared to Q2

​The forward 12-month price-to-earnings (P/E) ratio for the S&P 500 currently stands at 18.0. This is below the 5-year average but above the 10-year average. It is also lower than the forward P/E ratio recorded at the end of the Q2, indicating a slightly more favourable valuation for the index.