Heading into third-quarter earnings season, the S&P 500 is about 24% off its 52-week high after hitting a new bear-market low Tuesday. According to FactSet, the index is expected to report its lowest year-over-year earnings growth since the third quarter of 2020.
S&P 500 Estimate Revisions, Earnings Guidance
Analysts expect S&P 500 year-over-year earnings growth of 3.2%. That's a swift drop from the estimated growth rate of 9.8% just three months ago, on June 30. If 3.2% becomes the actual growth rate for the third quarter, it will be the lowest earnings growth rate since Q3 of 2020, according to FactSet Senior Earnings Analyst John Butters.
For S&P 500 companies, analysts have lowered earnings estimates for Q3 by a larger margin compared to recent quarters. On a per-share basis, estimated earnings for the third quarter have decreased by 6.3% since June 30. That's the largest decline in the quarterly EPS estimate for a quarter since Q2 of 2020.
Meanwhile, the number of S&P 500 companies that have issued negative EPS guidance for Q3 is lower compared to the last few quarters, but higher than the five-year average. At the same time, S&P 500 companies issuing positive EPS guidance for Q3 is higher than in the past couple of quarters and above the five-year average.
Companies continue to deal with persistently higher inflation, which figures to be a key theme of third-quarter results.
"U.S. large cap corporate earnings are not keeping pace with inflation because managements explicitly chose to spend margin dollars in the hopes of generating incremental revenues," according to Nicholas Colas, co-founder of DataTrek Research.
"In fairness, companies were running very high net margins last year (13% versus pre-pandemic 10%), so managers likely felt they had some wiggle room to go after marginal sales. Between negative real earnings growth and dramatic stock market declines, they now know that was a mistake," Colas noted. "The only positive here from a macro perspective is that this combination should force companies to cut costs such as payroll. While terrible for the individuals involved, this should start the process of reducing wage inflation, a key Fed goal."
Sector Estimates: Winners And Losers
According to FactSet, the Communication Services sector sees the largest estimate decrease since the start of the quarter at -13.2%. For example, Meta Platforms' EPS estimate declined from $2.71 to $1.93, while Alphabet's earnings estimate went from $1.39 to $1.28 per share.
On the upside, the Energy sector recorded the largest percentage increase at 6.6%, led by Exxon Mobil. The energy giant's EPS estimate went up from $2.99 to $3.45.
How To Handle S&P 500 Earnings Season
Earnings reports cause many of the largest moves in stocks, and they require special care. Strong earnings can fuel top stocks to previously untouched levels — and above new buy points — while a less-than-impressive announcement can send shares tumbling. The stock market correction further increases the risk of buying stocks.
Companies disclose their earnings reports four times a year, some weeks after the conclusion of each quarter. The quarterly reports offer investors an opportunity to examine how the company is performing at a detailed level. From there, analysts and professional fund managers use that information to project the company's future earnings and sales growth and create price targets for the company's stock price.
Check out IBD's Earnings Calendar for earnings previews, earnings due dates, Investing Action Plans, and stocks near buy zones ahead of earnings.
Be sure to follow Scott Lehtonen on Twitter at @IBD_SLehtonen for more on growth stocks and the S&P 500.
