Macro Intelligence: US Q3 earnings season 2023 sees resilient growth sparks optimism for global markets

Article written by Juliette Saly (ausbiz)

US economy defies expectations in 2023

The US economy has proven more resilient than anticipated throughout 2023, bolstering consumer demand. Reuters data indicate that S&P 500 companies overall are expected to have increased earnings by 1.3% year-on-year. Although a modest advance, this is significant as it marks a turnaround after three quarters of flat or declining profits.

Q3 and Q4 estimates chart

Q4 projections: the turning point?

The fourth-quarter outlook is also pivotal. Reuters data suggest Q4 earnings could rise nearly 11% from 2022. Analysts at the US financial data group FactSet note that the blended year-on-year earnings growth rate for the S&P 500 is currently 0.4%.

If this holds true after all reports have been lodged, it will represent the first quarter of year-on-year earnings growth for the index since Q3 2022.

S&P 500 end-of-quarter estimate vs actual chart

Diverging paths: Bloomberg's take on Q3 vs Q4

Elsewhere, Bloomberg economists forecast a minor Q3 earnings decline of -0.3%, followed by a sharp rebound in Q4. Data compiled by Bloomberg Intelligence project a net income growth of about 7.6% year-on-year for S&P 500 companies in Q4. Bloomberg predicts that the communications and utilities sectors will spearhead the recovery.

S&P 500 estimates chart

The market rebound: rally fueled by profits

A profit resurgence could fuel a rally in the index, which has witnessed a sharp two-month sell-off in large-cap companies. Despite a decline from its July peak, the S&P 500 is still up year-to-date by more than 12%.

Data from the London Stock Exchange show that the S&P 500 Index is trading at nearly 18 times forward 12-month earnings estimates even after the September quarterly decline. According to Reuters, this surpasses the index's long-term average of 15.6 times.

S&P 500 daily chart

Sector spotlight: the rise and fall of different industries

FactSet reports that the S&P 500's forward P/E ratio is below the 5-year average but above the 10-year average. Another potential uplift in investor sentiment could come from an expected increase in consumer earnings. Reuters projects earnings in the consumer discretionary sector (.SPLRCD) to rise by ~23% in Q3, as investors factor in peak rate hikes from the Federal Reserve.

FactSet observes that Amazon is the largest contributor to earnings growth for the sector. If Amazon were excluded, the blended earnings growth rate for the sector would decline to 14.4% from 22.1%. Conversely, the energy and materials sectors are expected to see a decline in revenue due to volatile commodity prices.

S&P 500 10-year overview chart

Lessons from history: Bank of America's insight

Bank of America states, "history suggests earnings typically recover more robustly than they fall, as downturns usually eliminate excess capacity, resulting in leaner cost structures and improved margin profiles.

Australian market catches the US tailwind

A positive ripple effect from US equities could boost sentiment in the Australian market, which has underperformed the S&P 500's year-to-date gains. The S&P/ASX 200 remains range-bound for 2023; however, many analysts anticipate a "Santa Claus" rally towards year-end.

S&P 500 EPS chart

The ‘Santa Claus Rally’ phenomenon

Shawn Hickman from Market Matters told ausbiz he expects a further 5% rally for the Australian equity market by year's end, notwithstanding "wild cards" such as Middle East conflict and rising bond yields.

Seasonal trends indicate that the ASX 200 often experiences a lift in the fourth quarter, with October typically marking a seasonal low before a "Santa Claus" rally into December.

ASX 200 seasonality chart