Deutsche with an update on US profit season. In a phrase, worse to come.
Coming into this earnings season, we expected earnings to be weak for a second straight quarter, for estimates to continue to slide but the eventual beat to come in close to the historical average of 5% (Q3 Earnings Preview: Downgrades To Continue, Oct 7 2022). The season is now around two-thirds of the way through, with 255 companies (68% of market cap) in the S&P 500 having reported.
- Average beats. The breadth and size of Q3 earnings beats are near historical averages but these are off estimates that have continued to be cut. The blended estimate for Q3 earnings (combining actuals plus consensus for those yet to report) as a result has barely ticked higher and is significantly below the typical upward trajectory at this stage of the earnings season. n Continued cuts. Consensus estimates for Q4 have fallen over -2% since the beginning of this earnings season, much larger than the typical -1%, and follow cuts of -6% in the prior three months. 2023 estimates have fallen by -2% this earnings season bringing the cuts since April to -7%. 2023 EPS consensus is now at $234, still significantly higher than our forecast of $195 which incorporates a recession next year in line with DB’s house economics view. The consensus forecast on the other hand looks to embody a soft landing.
- Underlying earnings growth near trend rates. Q3 earnings growth slowed further to 7.8% yoy but with several puts and takes: large swings in oil prices and therefore Energy earnings (+7.8pp), large dollar appreciation (-1.5pp), loan loss provisions (-3.6pp) and hurricane losses (-0.7pp). We estimate
underlying earnings growth to be around 5.8%, not far from the long-run trend rate of 6.5%. Median company growth which strips out the impact of outliers is also near trend at 6.2%. The level of earnings is still well above trend (+19%) given the boom over the last 2 years but several sector groups are getting closer to trend. - The overall market rally is in line with low positioning coming in. At the individual company level, outperformance after beating has been typical but misses have been punished severely.
