The third-quarter earnings season has kicked off with a positive note, as most of the S&P 500 companies that have reported so far have surpassed the analysts’ estimates. Despite the uncertain macroeconomic environment, the corporate America has shown resilience and optimism for the future.

Earnings Recession May Be Over

According to Bank of America Research’s equity strategy team, after 32 S&P 500 companies have reported earnings, companies in the index are beating Wall Street’s expectations by an average of 9% on earnings per share. In aggregate, after two quarters of declines, EPS for S&P 500 companies is up 1% compared to the same quarter last year, indicating that the earnings recession may be over.

S&P 500 Companies Beat Earnings Expectations Amid Macro Challenges
S&P 500 Companies Beat Earnings Expectations Amid Macro Challenges

The predictions for an end to the earnings recession have passed their first test. The strong earnings performance reflects the robust consumer spending, the recovery of some sectors from the pandemic-induced disruptions, and the effective cost management by the companies.

Banks Lead The Way

Among the sectors that have reported so far, financials have been the most impressive, as they have benefited from higher net interest income, lower loan loss provisions, and improved outlook guidance. Wells Fargo & Co. and JPMorgan Chase & Co. are leading the biggest Wall Street banks in tapping the US investment-grade market after reporting third-quarter earnings.

Wells Fargo is issuing bonds in as many as two parts while JPMorgan is in the market with a three-part offering. Big banks were expected to stay on the sidelines because they’re well-funded for the short term and borrowing costs remain high. However, they may be anticipating higher interest rates in the future and taking advantage of the current market conditions.

Macro Headwinds Remain

Despite the solid start of the earnings season, some analysts warn that the macroeconomic challenges are still looming over the corporate America. The persistent inflation pressures, the supply chain bottlenecks, the labor shortages, and the policy uncertainty are some of the factors that could dampen the earnings growth in the coming quarters.

In a research note Monday, RBC Capital’s head of US equity strategy Lori Calvasina described the start of earnings season as “solid” despite “macro headwinds.” And, importantly, despite challenges such as sticky inflation and a higher for longer stance from the Federal Reserve, RBC raised its S&P 500 EPS forecast. RBC’s latest accounting for recent macro movements pushed their projections higher, with S&P 500 earnings up to $223 (from $220) in 2023 and $232 (from $229) in 2024.

However, Calvasina’s S&P 500 price target for 2023 remains unchanged at 4,250, as she notes S&P 500 EPS is just one of several things that drive her calls. When zooming out beyond just earnings, Calvasina still finds the macro picture to be choppy.

What To Watch Next

The earnings season will continue this week with more reports from various sectors, including technology, health care, consumer discretionary, and industrials. Some of the notable names that will announce their results are Netflix, Johnson & Johnson, Procter & Gamble, Tesla, Intel, and American Express.

Investors will be looking for clues on how these companies are coping with the macro challenges and what are their expectations for the future. The market reaction to the earnings reports will also depend on how much optimism or pessimism is already priced in.


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