A trend of positive earnings revisions is emerging

Note: Below is an excerpt from this week’s earnings trends report. You can access the full report containing detailed historical data and estimates for the current and subsequent periods by clicking here>>>

Here are the most important points:

• The overall earnings picture remains stable and resilient, with the outlook starting to improve in recent months. The revision trend has visibly stabilized recently, with estimates for several key sectors increasing.

• S&P 500 Index earnings in Q3 2023 are currently expected to decline by -1.5% on higher revenues by +0.7%. Excluding the energy sector, third-quarter earnings for the rest of the index would increase by +3.4% with higher revenues by +3.2%.

The slightly mixed performance of traditional retailers in their second-quarter earnings reports was primarily due to management execution and, to a lesser extent, to the significant reduction in consumer spending.

In recent days, we’ve covered target TGT, which missed revenue estimates and calculations but performed better on margins and inventory. We noted that while management appeared satisfied with current inventory levels, investors will reasonably wonder whether Target has actually resolved this issue as weak sales and traffic trends in the second quarter will result in unsold inventory in the coming periods.

Unlike Walmart, whose quarterly report showed overall strength, Target struggled in the post-Covid period because it failed to anticipate shifts in consumer spending away from discretionary categories such as clothing, home furnishings and electronics, resulting in unsold inventory. which then had to be cleared through markdowns.

Walmart, like Target, stumbled last year after its first-quarter report but quickly recovered. In its second-quarter report, Walmart benefited from broad market share gains and momentum from key growth initiatives.

While Walmart has a much larger grocery business, Target has historically been seen as a play on discretionary goods, for which demand has declined in the post-Covid period. That said, Target appears to have lost more than other retailers selling comparable merchandise, and TJX Companies TJX is a good example of one such retailer.

The challenge for retailers like Target, Walmart, TJX and others is not only having the right inventory, but also dealing with higher expenses related to transportation, payroll and other items.

We have provided an updated second-quarter earnings season scorecard for the Zacks Retail sector in a detailed report.

Outside of the retail sector, the Q2 2023 reporting cycle has ended for 11 of the 16 Zacks sectors, and 98.4% of the S&P 500 stocks have already reported earnings.

The second quarter of 2023 is expected to be the third consecutive quarter of declining earnings for the S&P 500 Index. Earnings are currently expected to decline further in the third quarter by -1.5% before growth turns positive in the fourth quarter and continues into 2024. In fact, profits for the third quarter would have been positive if not for the weakening energy sector.

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As you can see from quarterly earnings growth expectations, there is no long-term recession in sight in this short-term earnings forecast. A broad-based view of corporate profitability over the long term also doesn’t leave much room for a recession, as you can see in the chart below.

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These growth expectations reflect the current bottom-up consensus earnings estimates for individual S&P 500 companies, which in turn are based on estimates from the individual sell-side analysts who cover those companies.

Regular readers of our earnings commentary know that since the beginning of Q2 2023, we have recorded a clear stabilization of the estimate revision trend, reversing the negative trend that had persisted for almost a year earlier.

S&P 500 total earnings estimates have declined only slightly since early April, and many key sectors have started to see moderate positive estimate revisions. These sectors include construction, industrial products, automotive, technology, medical and retail. These trends were confirmed and strengthened by the financial results for the second quarter and the management’s guidelines and comments for the current and upcoming quarters.

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