​​Q3 Earnings season review

​​​The quarterly round of US corporate reporting is almost finished, giving investors a vital insight into the current state of the US and global economy. Despite the gloomy prognostications of a year ago, a recession has yet to arrive in the US, and the world’s largest economy, and its companies, have managed to navigate the choppy waters of 2023 remarkably well.

​The past year has seen the Federal Reserve (Fed) engage in one of its most aggressive hiking cycles, taking interest rates to their highest level in fifteen years. That earnings have held up so well is a sign of strength in US consumers and businesses.

​​Stock markets have rebounded over the past year, and while much of the gain has been driven by tech stocks, the latest picture provided by earnings season suggests broad-based support for further gains in equities, even after the surge of the past month.

​Earnings surprise on the upside

​Third quarter (Q3) earnings season for the S&P 500 has shown positive surprises in both the number and magnitude of earnings, surpassing the 10-year averages. This has resulted in higher earnings for the index, marking the first year-over-year growth since Q3 2022.

​So far, 94% of S&P 500 companies have reported actual results for Q3 2023. Of these, 82% have reported earnings per share (EPS) above estimates, which is higher than the five-year and ten-year averages, according to data from FactSet. If this holds into the end of earnings season, it will be the highest since Q3 2021. On average, companies are reporting earnings 7.1% above estimates, exceeding the 10-year average.

​Positive earnings surprises from the Financials, Consumer Discretionary, Information Technology, and Communication Services sectors have contributed to the increase in the index's earnings. However, downward revisions and negative surprises in the Health Care sector partially offset this growth.

​Revenues also beat estimates

​Regarding revenues, 62% of S&P 500 companies have reported actual revenues above estimates, which is lower than the five-year and ten-year averages. In aggregate, companies are reporting revenues 0.7% above estimates, below the historical averages.

​The Energy and Health Care sectors have driven the overall revenue growth rate, with positive surprises outweighing negative surprises from the Utilities sector.

​Q4 expectations

​Looking ahead, analysts expect modest earnings growth of 2.9% for Q4 2023, lower than the September 30 estimate of 8.0%. For the full year 2023, analysts predict earnings growth of 0.6%, slightly below the previous estimate. However, for 2024, analysts are forecasting more robust earnings growth of 11.6%, although slightly lower than the September 30 estimate.

​Dow price chart – technical analysis

​Things have changed dramatically for US markets since JPMorgan reported earnings on 13 October, kicking off the Q3 earnings season.

​Then, the Dow was on the cusp of peaking at 34,000 before it began a plunge to a seven-month low. Just as things seemed to point towards a wipeout for the year, the index rallied from the end of October, and has not looked back since.

​In the space of a month, the index has gained almost 3000 points, and is now on its way to challenge the 2023 highs from the end of July, just above 35,500. A move above this would see the index sitting at its highest level since February 2022, and be just 3% from the record highs of January 2022.

​The parabolic move of the past month may yet see some weakness as we head into December, but with earnings still pointing towards a strong US economy, the fundamentals and technical appear to have aligned to support a bullish move as 2023 gives way to 2024.

​Onwards to Q4 earnings

​Much of the outlook for 2024 remains unclear, and there is still plenty of caution among investors. But for the moment, earnings are not giving any real cause for concern, and it will take a significant deterioration in economic data and corporate performance to suggest that a recession is on the horizon.

​It is important to keep an open mind, but for the moment US stocks, and large-cap ones in particular, seem well-placed for more gains into 2024.