Q2 2023 Earnings Outlook: Challenging Times Ahead But Analysts Cautiously Optimistic

According to Factset, the estimated (year-over-year) earnings decline for Q2 2023 is -6.8%, which is below the 5-year average earnings growth rate of 12.0% and below the 10-year average earnings growth rate of 8.5%. If -6.8% is the actual decline for the quarter, it will mark the largest (year-over-year) earnings decline reported by the index since Q2 2020 (-31.6%). It will also mark the third consecutive quarter in which earnings have declined year-over-year.

The Information Technology sector has recorded the largest percentage increase in estimated (dollar-level) earnings of all eleven sectors since the start of the quarter at 2.3% (to $83.4 billion from $81.5 billion). As a result, the estimated (yearover-year) earnings decline for this sector has fallen to -3.7% today from -5.9% on March 31.

Goldman Sachs analysts expect a year-on-year consensus EPS estimates of -8% in EPS in Q2 2023. However, their projections indicate that EPS growth will be flat in Q3 2023 and rise by 8% in Q4 2023. This suggests that analysts are optimistic about the future.

In terms of guidance, the percentage of S&P 500 companies issuing negative EPS guidance for Q2 2023 is equal to the 5-year average. At this point in time, 113 companies in the index have issued EPS guidance for Q2 2023. Of these 113 companies, 67 have issued negative EPS guidance and 46 have issued positive EPS guidance.

After the recent market rally, Q2 2023 performance and guidance become significant.

Fundstrat's Tom Lee observed that the forward price-to-earnings ratio of the S&P 500, excluding mega-cap tech stocks, was 15.7x at the start of the year, and now stands at 16.4x, which is "barely" higher.

Lee anticipates the stock market's valuation will increase with positive corporate earnings growth, as he believes companies will be perceived as resilient and starting a new EPS cycle. Additionally, Lee suggests that the rise of AI could lead to significant profit growth and possibly a "supercycle" similar to previous technological advancements such as PCs, the internet, and cloud computing.

Source: Factset, Goldman Sachs, Fundstrat