When someone says, “It’s football season”, Kentuckians, in their own dialect, instantaneously translate that to “Keeneland is about to open”. Even more exciting this year, the racetrack will be getting an extra weekend of fun with the ’22 Breeders Cup being raced the first weekend in November. For those that follow, look up the horse Flightline – you won’t be disappointed. So, grab your Keeneland Breeze and get touched up on your trifecta box par wheel.
This week, earnings season is being called to the post, as banks will begin reporting Friday and many other larger companies will follow suit the following week.
Q3 ’22 Earnings Season
Everyone is debating where the earnings numbers for ‘22 and ‘23 will shake out. The EPS estimates are all over the map and for good reason. When moving through a slowdown with Fed tightening in the works, it’s nearly impossible to predict which weak links will affect EPS estimates.
This earnings season in particular holds importance as it could shape the debate between the bulls and the bears. A sharp reduction in earnings estimates could signal significant earnings cuts and a potential earnings recession. On the other hand, more resilient Q3 numbers and stable guidance could suggest a more moderate earnings correction or at least push the earnings debate until January’s Q4 reporting season.
As always, the Q3 numbers will be important and drive short-term moves in the market but investors are more closely watching for ’23 guidance. The market has started to see cracks with some bell-weather stocks reporting both top-line and bottom-line misses in recent weeks; however, the majority of company guidance still suggests that margin and earnings are in a healthy state despite many of the macro headwinds.
Since the peak of estimates in April, Q3 ’22 expectations are down 8%, while S&P 500 ex. Energy is down close to 11%.
As has been the case since the summer, large cap EPS expectations are coming down faster than small/mid cap, while growth EPS expectations are coming down faster than value. This is VERY ATYPICAL in an economic slowdown in the age of globalization, but we expect it to continue as for the first time, the US economy is in far better shape (not great, just better than Europe or Asia.) – A truly unique time period.
Lastly, I do think that there is a potential to see another quarter of “relative” strong earnings. Why?
- Consumers still have excess savings (roughly $1 trillion) which alone could boost nominal spending by 7% over the next year.
- Consumers’ willingness to borrow, as the job market remains strong, bloated corporate labor costs, with compensation up 10% YoY in Q2 ’22, and probably up another 8% in Q3 ’22 along with higher input prices.
So to bring those two points together, companies are taking advantage of strong nominal growth to raise prices.
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