by Liz Ann Sonders, Chief Investment Strategist, & Kevin Gordon, Charles Schwab & Company Ltd.
Earnings season has thus far been a mixed bag, and despite a notable increase in the beat rate, the market is rightfully shifting focus to guidance for the rest of the year.
On the right path?
Growing pains still here
Source: Charles Schwab, I/B/E/S data from Refinitiv, as of 8/4/2023.
Y-axis truncated for visual purposes. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. Past performance is no guarantee of future results.
Worth pointing out is that earnings growth is expected to rebound at a steep pace in the back half of this year, then climb to a double-digit pace into 2024. In the face of leading indicators that continue to weaken, tightening lending standards, and the climb in interest rates, it seems rather lofty (for now) to assume that growth will hold at that pace. Plus, we like to consistently remind investors that estimates further out should be taken with several grains of salt. A year ago, the consensus estimate for earnings in the second quarter of 2023 was nearly 11%; that has clearly been chopped considerably.
Energy a considerable drag
Source: Charles Schwab, I/B/E/S data from Refinitiv, as of 8/4/2023.
Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. Past performance is no guarantee of future results.
One development worth watching is if the "hook" pattern seen year-to-date continues. Even though there was no earnings growth in the first quarter, that was a significant improvement from the low point, which had baked in a nearly 5% decline. Admittedly, analysts lowered the bar too far, too fast at the beginning of the year, which made results look less terrible. You can see earnings starting to replay that pattern in the second quarter, but given reporting season is close to wrapping up, it would take a heavy lift from a small number of companies to get earnings back to breaking even.
Getting the hook again?
Source: Charles Schwab, I/B/E/S data from Refinitiv, as of 8/4/2023.
Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. Past performance is no guarantee of future results.
2022, meet 2023
Source: Charles Schwab, I/B/E/S data from Refinitiv, as of 8/4/2023.
Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. Past performance is no guarantee of future results.
Better-than-expected doesn't cut it
Beating the odds
Source: Charles Schwab, I/B/E/S data from Refinitiv, as of 8/4/2023.
Downgrades outpacing upgrades
Source: Charles Schwab, Bloomberg, as of 7/21/2023.
The Citi U.S. Earnings Revisions Index is calculated as the ratio of analysts' earnings per share revisions to listed companies tracking equity analyst revisions upgrades (positive) vs. downgrades (negative).
An unenthusiastic response
Source: Charles Schwab, Bloomberg, as of 8/4/2023.
Past performance is no guarantee of future results.
In sum
We are approaching critical moments of truth for the economy in the back half of the year. If earnings and revenue growth hold up (and rebound) as monetary policy continues to tighten and cracks in the labor market remain, resilience will have taken on a new, stronger meaning. For now, though, we're not yet out of the woods.
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