Oct 17, 2023 - Economy

Wall Street's earnings recession may be over

Data: FactSet; Note: Q3 2023 data is an estimate; Chart: Axios Visuals
Data: FactSet; Note: Q3 2023 data is an estimate; Chart: Axios Visuals

A recession in S&P 500 earnings may have ended, although just barely.

Why it matters: The surge in long-term interest rates has taken the wind out of the stock market's sails this year. A revival of earnings growth could help heal the damage.

The latest: Third-quarter earnings season gets fully underway this week as more than 50 members of the S&P 500 report results for the three months that ended in September.

  • Big-name companies on deck in the coming days include Bank of America and Goldman Sachs (Tuesday), Tesla and Netflix (Wednesday), American Airlines and AT&T (Thursday), and American Express (Friday).

Context: Quarterly profits have been down year over year for three straight quarters.

By the numbers: For Q3, however, Wall Street analysts think S&P 500 companies will report aggregate earnings per share of $55.72, up 1.3% from last year's third quarter.

  • Excluding energy companies, where lower crude oil prices have crimped profits, the S&P 500 is expected to post earnings growth of about 4%.

The big picture: The slight optimism hinges on top-line sales numbers showing stability, or even slight growth.

  • Q3 sales per share are expected to be up 2.1%, according to FactSet estimates, up slightly from a 1.7% increase in Q2.

Yes, but: Profit margins are a concern. They held up better than expected earlier this year, as wholesale price inflation tumbled far faster than consumer inflation, leaving a healthy cushion for corporate profits. That may be changing.

  • "We believe corporate pricing is likely softening," JPMorgan market analysts wrote in a note Monday. "Weaker pricing at the time of elevated input costs such as wages and rates could lead to [a] margin squeeze."

💭 Our thought bubble: Strong corporate pricing power — a boon for profits — is the flip side of high consumer inflation, a bugaboo for the Federal Reserve.

  • Weaker corporate profits are another reflection that the runaway inflation of 2021-22 has been mostly corralled.
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