{"id":9452,"date":"2023-05-01T15:57:27","date_gmt":"2023-05-01T15:57:27","guid":{"rendered":"https:\/\/zacksim.com\/financial-professionals-insights\/?p=9452"},"modified":"2023-05-01T15:57:28","modified_gmt":"2023-05-01T15:57:28","slug":"mitchs-early-takeaways-from-the-q1-2023-earnings-season","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/mitchs-early-takeaways-from-the-q1-2023-earnings-season\/","title":{"rendered":"Mitch’s Early Takeaways From the Q1 2023 Earnings Season"},"content":{"rendered":"\n

Results from Q1 2023 earnings season are arguably carrying extra weight for investors, as many try to gauge how higher interest rates and bank stress may have combined to impact profits in the first three months. As I write, it\u2019s still too early in the reporting season to draw sweeping conclusions. But I do think it\u2019s fair to say that any narratives about an \u2018earnings cliff\u2019 can be safely set aside. It\u2019s just not happening.1<\/sup><\/p>\n\n\n\n

As my colleague and the Director of Research at Zacks, Sheraz Mian, put it: \u201cThe picture emerging at this early stage is one of resilience and stability, with an above-average proportion of companies beating estimates and providing a good-enough outlook in an uncertain macro environment.\u201d2<\/sup><\/em><\/sup><\/em><\/p>\n\n\n\n

Indeed, 77% of the approximately 90 reporting S&P 500 companies have beaten earnings expectations, which marks a higher beat percentage for these specific companies than in each of the previous three quarters. One question that\u2019s emerging about this earnings season is whether analysts were too pessimistic in lowering earnings expectations, or whether corporations are delivering stronger-than-expected results in a better-than-expected macro environment.<\/p>\n\n\n\n

I think both are true.<\/p>\n\n\n\n

On the analyst side, there hasn\u2019t been adequate appreciation for the idea that the earnings recession likely started about a year ago, which I think implies that we\u2019re nearing the bottom or already past it. Energy sector earnings have distorted the overall picture in the last year, with high commodity prices resulting in a profit surge that skewed results for the broad S&P 500. But when we strip away the energy sector\u2019s contributions, we find that S&P 500 earnings have been contracting on an annual basis since Q2 2022. In short, forward estimates today don\u2019t seem to be considering the possibility of an earnings recovery in the second half of the year.<\/p>\n\n\n\n

Banks have also been a key driver in this quarter\u2019s better-than-expected results (to date), but not in the way most investors expected in the wake of regional banking stress. The worst fears of a financial contagion did not come to fruition, and major banks have performed far better than anticipated. As a result, Q1 earnings for Financials are now expected to be up +7.6% from the year-earlier period, a significant improvement from the +0.3% growth expected just one week ago.<\/p>\n\n\n\n

The three most prominent players in the space \u2013 JPMorgan, Bank of America, and Citigroup \u2013handily beat top- and bottom-line estimates. JPMorgan\u2019s Q1 earnings, for instance, were up an impressive +52.4% from the same period last year on +24.8% higher revenues on record net-interest income. Earnings estimates for the June quarter have been increasing for these major banks as well, which I think investors should read as a significant positive surprise. Remember, just one month ago many were questioning the health and stability of the banking sector.<\/p>\n\n\n\n

A final observation I\u2019d make about this earnings season is that operating margins appear to have turned the corner for the positive. The past year has posed many challenges for corporate profits, largely from rising labor costs and some companies\u2019 limited ability to pass on rising input costs to consumers. Those pressures appear to be easing now, and there\u2019s a good argument that margin pressures may have peaked in Q4 2022 (see chart below). This metric is critical, as operating margins are an important gauge of profitability and also a leading indicator for stocks.<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Zacks Investment Research3<\/sup><\/em><\/strong><\/p>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

As I mentioned at the outset of this column, it\u2019s still early in Q1 2023\u2019s earning season, so there will be plenty more insights and takeaways to parse. I\u2019ll likely revisit the earnings story once all the results are in.<\/p>\n\n\n\n

But our early read is that earnings overall are shaping up to be far better-than-expected this quarter. In my view, analysts got too cautious in anticipating the fallout from bank stress, which to date has not materialized into much of an economic impact. But there have also been persistent expectations for a recession\u2014which has yet to arrive\u2014baked into estimates. When looking out at estimates for future quarters, the key question becomes: what happens if the U.S. avoids recession altogether? <\/em><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

While it is still early, Mitch sees some definite trends already taking shape\u2014in particular, overall earnings so far are much better than expected.<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[181,1],"tags":[],"class_list":["post-9452","post","type-post","status-publish","format-standard","hentry","category-financial-professionals","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9452","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=9452"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9452\/revisions"}],"predecessor-version":[{"id":9455,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9452\/revisions\/9455"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=9452"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=9452"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=9452"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}