RIP Earnings Recession: 3Q Reports Turn Positive

The earnings recession is over. At least, that’s what a FactSet survey of analysts concluded. After three consecutive quarters of S&P 500 negative earnings per share growth, which gave Wall Street the heebie-jeebies, the third quarter (with slightly more than 80% of the index’s companies reporting) is slated to come in at a 3.7% EPS increase.

True, that isn’t an enormous profit increase, but it is better than we have seen. If so, the stock market, whipsawed since August, could well benefit.

Earlier this year, talk was rife that earnings would be lousy for some time, given escalating interest rates, persistent inflation and international tensions. The first two fears are abating, and thus far the Russia-Ukraine and Israel-Hamas wars have not ignited major conflicts elsewhere.

“It’s clear to us that the earnings recession is over as earnings are set to grow

for the first time in four quarters,” wrote David Lefkowitz, head of U.S. equities at UBS Global Wealth Management, adding that, “a ‘soft-ish’ landing for the U.S. economy appears achievable and would support our expectations for 9%” EPS growth next year. FactSet’s survey is even more sanguine about 2024, averaging 11.9%; thanks to the bum first half of 2023, it expects this year as a whole to come in at 0.6%.

Increasingly, companies are exceeding projections, generally a positive sign for the future. Of S&P members reporting thus far, 82% showed EPS greater than estimates, higher than the five-year average of 77% and the 10-year average of 74%. If the remaining S&P 500 companies report in line with the results to date, that will be the highest percentage showing of a positive EPS surprise since Q3 2021 (also 82%).

None of this is to say that strategists are expecting a boom anytime soon. FactSet’s November 3 estimate of 11.9% earnings growth next year trails its September 30 estimate of 12.2%. The FactSet 2024 estimate also is lower than the average of the five most recent complete years (2018 through 2022), 18.2%.

As always, down at the individual level, analysts are mixed on what lies ahead. Michael Wilson, the famously bearish chief U.S. equity strategist at Morgan Stanley, is pessimistic about this year and next.

Earnings projections are “too high for the fourth quarter and 2024, even in an economy that’s performing well,” Wilson told Bloomberg. The effects of higher interest rates are continuing to reverberate among companies, to the detriment of their upcoming performance, he opined.

But to UBS’s Lefkowitz, continued strong consumer spending will be the dominant factor in boosting earnings. He wrote that “S&P 500 profits skew more toward goods rather than services, so a rebound in goods activity should support earnings going forward.”