Second-quarter earnings season is kicking off this week. Investors may want to strap in because the collective S&P 500 profits are expected to decline the most in three years.
According to FactSet, analyst estimates add up to an overall S&P 500 earnings drop of 7.2% year over year. The Q2 drop would be the biggest since the 31.6% plunge in the Covid-hobbled second quarter of 2020.
The estimated drop grew from an estimated decline of 6.9% a week ago, and a more modest -4.7% estimate on March 31.
The S&P Energy, Materials and Health Care sectors' earnings are expected to drop the most in Q2, FactSet says.
Sectors Expected To Outperform This Earnings Season
Seven out of the 11 sectors are expected to report year-over-year earnings growth. The leading sectors include Consumer Discretionary and Communication Services.
The Consumer Discretionary sector is projected to post 26.8% growth. Amazon.com contributes to a majority of the increase. Excluding the online retailer, the number would drop to a 6.2% increase.
FactSet shows 12.6% Q2 earnings growth for the Communication Services sector, where Meta Platforms and Alphabet are the main components.
The Information Technology sector showed the biggest percentage increase in estimated earnings dollars since March 31.
Five of the IT companies show Q2 profit estimates rising by over 10%. Two noteworthy ones — and it may be no surprise — are chipmaker and AI giant Nvidia, after its impressive earnings report in May, and semiconductor tester Teradyne.
The two areas in the sector expected to outshine include hotels, restaurant and other leisure industries, with robust 179% profit growth. The auto components sector is estimated to see 90% growth.
Companies Giving Positive Q2 Guidance
Only a little over 20% of the S&P 500 companies gave second-quarter EPS guidance. Forty-six companies issued positive EPS guidance, while 67 gave a negative Q2 earnings outlook.
This is the highest number giving positive guidance since the third quarter of 2021, and an improvement over the last few quarters. Those numbers also beat the five- and 10-year averages, respectively.
Earnings Season: Q3 Outlook And Beyond
The earnings slump could end soon. According to FactSet, analysts forecast S&P 500 earnings growth of 0.3% in Q3, and a healthy 7.8% in Q4. Full-year 2023 earnings growth is projected at 0.8%. Next year shows a much more enthusiastic 12.4% growth rate.
The Communication Services sector is expected to lead Q3 with 26.7% profit growth. The Utilities, Industrial, Consumer Discretionary and Financials sectors are all forecast at around 13% EPS growth.
According to FactSet, 50% of Consumer Discretionary companies and 33% of IT companies gave positive Q3 earnings guidance for the next earnings season.
The two S&P 500 companies with the largest Q3 EPS revisions are Lennar and CarMax. Lennar's Q3 EPS estimate increased 30% and CarMax's EPS grew 23%.
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