Aug 18, 2023 - Economy

Big companies rake in stronger profits than expected in second quarter

S&P 500 earnings-per-share
Data: FactSet; Graphic: Rahul Mukherjee/Axios

Profits held up far better in Q2 than folks on Wall Street expected.

Why it matters: Corporate America's resilient bottom line is another indication that the economy could pull off the much-ballyhooed soft landing.

The latest: Target and Walmart closed out the weeks-long earnings extravaganza on an upbeat note, with both beating profit bogeys this week.

The big picture: The second quarter was a strong one for profits, with nearly 80% of S&P 500 companies reporting numbers that were better than Wall Street analysts had forecast.

  • According to data provider Refinitiv, Q2 2023 had the highest rate of companies beating expectations since Q3 2021.

Between the lines: While top-line revenue growth has been a bit disappointing — mirroring a slowdown in inflation that made raising prices tougher — companies have been able to preserve, and in some cases even fatten profit margins.

  • That's because the price pressures companies face from suppliers have fallen a lot faster than the prices they're charging customers.

💭 Our thought bubble: A clear signal on whether earnings season was "good" or "bad" can be found in the way Wall Street analysts change their forecasts in response, charted above.

  • You can see that after companies started reporting Q2 results, analysts sharply ratcheted up their expectations for the profits that these companies will earn over the next 12 months — just like they did during the Q1 earnings season.
  • In other words, analysts liked what they saw in the results — and what they heard from executives.

The intrigue: Conventional wisdom suggests a rising earnings outlook should drive stocks higher. But as we've argued before, conventional wisdom overstates how much the stock market's moves are related to profitability.

  • In fact, the S&P 500 is down about 3% since the start of earnings season, but that's largely because of the rise of interest rates.
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