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Q3 Results Reflect Positivity, But Outlook Uncertain

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With Q3 results from more than 80% of S&P 500 members already out, we can confidently say that actual results have once again turned out to be better than expected. Keep in mind that Q3 earnings estimates had barely budged ahead of the start of the reporting cycle, which makes the outperformance all the more significant.

We continue to be of the view that while the overall earnings picture isn’t great, it isn’t falling off the cliff either. In fact, Q3 earnings growth is on track to turn positive, which follows three back-to-back quarters of declines.

On the negative side, the Q3 results show a notable loss of momentum on the revenues side, both in terms of the growth rate as well as the proportion of these companies beating top-line expectations.

An even more disconcerting development is on the revisions front, with estimates for the current (2023 Q4) and coming quarters starting to come down, which follows a relatively stable revisions trend over the preceding six months.

Here are the four notable features of the Q3 earnings season:

First, earnings growth is on track to turn positive. Q3 earnings for the 405 S&P 500 companies that have reported already are up +0.4% from the same period (up +5.6% excluding the Energy sector drag).

For the quarter as a whole, combining the actuals for these 405 companies with estimates for the still-to-come 95 index members, Q3 earnings are on track to increase by +1.5% on an equivalent growth in revenues.

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Image Source: Zacks Investment Research

As you can see above, the positive Q3 earnings growth follows three quarters of declines, with the growth pace expected to improve steadily in the coming quarters.

Second, fewer companies have been able to beat Q3 revenue estimates. For the 405 S&P 500 members that have reported Q3 results, 82.5% are beating EPS estimates, and 61.5% are beating revenue estimates.

The comparison charts below put the Q3 EPS and revenue beats percentages in a historical context.

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Image Source: Zacks Investment Research

As you can see above, the Q3 EPS beats percentage is tracking above the 5-year average (preceding 20 quarters), but the revenue beats percentage is notably weaker. In fact, the 61.5% beats percentage for these 405 S&P 500 members is the lowest since the first quarter of 2020 when Covid got underway.

In terms of revenue growth, the Q3 top-line growth rate of +1.6% for this group of 405 index members that have reported is modestly better than what we had seen in the preceding period, but otherwise representative of a steadily decelerating trend, as you can see in the chart below.

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Image Source: Zacks Investment Research

Third, the Tech sector has resumed its growth trajectory. We still have a number of Tech sector companies that have yet to report Q3 results. But Q3 earnings for the 73.3% of Tech companies in the S&P 500 index that have already reported results are up +15.8% on +2.7% higher revenues.

For the quarter as a whole, combining the actuals that have come out with estimates for the still-to-come Tech companies, Q3 earnings are on track to increase +20.8% on +4.2% higher revenues.

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Image Source: Zacks Investment Research

The Tech sector’s growth profile has been going through a post-COVID adjustment phase since the fourth quarter of 2021, with a low single-digit earnings growth rate in the preceding period (2023 Q2) appearing after four quarters of declines.

As you can see in the chart above, the sector is expected to resume its historical role as a growth driver going forward.

The Tech sector’s renewed growth trajectory is particularly notable when we look at the earnings picture for the mega-cap Tech players, what we refer to as the ‘Big 7 Tech players’ that includes Apple (AAPL - Free Report) , Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) , Microsoft (MSFT - Free Report) , Nvidia (NVDA - Free Report) , Meta (META - Free Report) and Tesla (TSLA - Free Report) .

The market wasn’t impressed with Apple’s results, whose Q3 earnings were up +10.8% on essentially flat revenues (down -0.7%). But more than Apple’s Q3 results, investors didn’t like the company’s underwhelming guidance for the December quarter.

Q3 earnings for the ‘Big 7 Tech Players’ increased +51% from the same period last year on +12.4% higher revenues, with the group’s growth picture expected to remain strong in the coming periods as well, as the chart below shows.

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Image Source: Zacks Investment Research

Fourth, estimates for the current and coming quarters have started coming down in a significant way over the last few weeks.

The expectation currently is for 2023 Q4 earnings to be up +1.9% from the same period last year on +2.7% higher revenues. This growth pace represents a notable decline from what was expected for the period in late September of +5.3% earnings growth on +3.6% higher revenues.

The cuts to Q4 earnings estimates are widespread, with estimates getting cut for 11 of the 16 Zacks sectors. The sectors suffering the biggest cuts include Autos, Medical, Transportation, and Consumer Discretionary.

On the positive side, estimates have increased for the Energy, Utilities, Industrials, and Retail sectors.

Estimates for the Tech sector have modestly gone up, a significant deceleration from the pace of positive estimate revisions that we saw in the last two quarters.

The Q3 Earnings Season Scorecard & This Week’s Docket

Including all the earnings reports through Friday, November 3rd, we now have Q3 results from 405 S&P 500 members, or 81% of the index’s total membership. Total Q3 earnings for these companies are up +0.4% from the same period last year on +1.6% higher revenues, with 92.5% beating EPS estimates and 61.5% beating revenue estimates.

We have another super busy reporting docket this week with more than 1200 companies reporting Q3 results, including 52 S&P 500 members. The notable companies reporting results this week include Disney, Uber, Lyft, Berkshire Hathaway, and others.

The comparison chart below shows the ‘blended’ Q3 beats percentage of 55.3% in a historical context. This metric shows the proportion of these 405 companies that have beaten both EPS and revenue estimates.

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Image Source: Zacks Investment Research

For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>Earnings Growth Turns Positive 

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