What can we expect from Q3 earnings season?
Beating Downgraded Earnings
Consensus forecasted a -0.3% year-on-year earnings decline for Q3 2023. This is the fourth quarter in a row where expected earnings growth has been negative since COVID-19. Year-to-date, Wall Street analysts have downgraded this year's earnings by about 4%, from 230.00 to 221.06. Such pessimism is expected as a recession looms, with higher interest rates and rising geopolitical risks.
However, actual earnings turn out better than the already low expectations. Several major banks released earnings last week, and most are beating EPS consensus. JP Morgan JPM 0.00%↑ beat by +10.5%, Wells Fargo WFC 0.00%↑ beat by +18%, BLK 0.00%↑ beat by +33%, and Citigroup C 0.00%↑ beat +24.5%. These are big surprises, but they seem underappreciated. Considering the huge beat, WFC share price only increased by +3% and JPM only by +1.5%, while C and BLK closed in the red the day after the earnings announcement.
Other sectors are also beating consensus. For example, Nike NKE 0.00%↑ beat by 24%, Domino’s Pizza DPZ 0.00%↑ beat by 26%, and FedEx FDX 0.00%↑ beat by 23%. And their share price were largely muted.
So far, earnings surprises are higher this quarter. Among S&P 500 companies that have released actual Q3 2023 earnings, 84.0% have reported actual EPS above the estimate. In aggregate, these actual earnings are 10.1% above estimates, higher than the previous quarter and higher than the 5-year average.
Thus, we are likely to see another season of earnings beat for this quarter.
Bull Through The Year End?
Maybe. Or not.
So far, market doesn’t appreciate positive surprises. Maybe the fear of recession are bigger than the lagged earnings data. Company guidance are not helping too. Out of 9 S&P 500 companies that have issued guidance for the next quarter, only 5 that issued positive ones.
According to Stifel, we are going to embrace the recession by January 2024. They made this prediction based on historical statistics of the inverted yield curve (the 10-year Treasury yield minus the 3-month Treasury Bill yield) since 1968.
The strength of stock market this year is exceptional given the rise in government yield. Valuation wise, an increase in government yield means an increase in opportunity cost, and in turn makes stocks looks unattractive unless it is traded cheaper. Year-to-date, the 10-year Treasury yield rose from 3.8% to 4.6%. However, the Price to Earnings ratio of S&P 500 also increase roughly from 17x to almost 20x in this year’s peak.
This disconnection must be resolved first before we have a clear path for the stock market.
IPO — The Company that Made Steve Jobs’ Sandal
Last week’s IPO was quite packed with blank check company, tech company, and yes, you heard it right — the company that made Jobs’ sandal, Birkenstock. You may recall few years ago, Steve Jobs’ old Birkenstocks sold for nearly $220,000.
SPKLU 0.00%↑ Spark I Acquisition Corp, a newly formed Cayman Islands exempted company established for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization, or similar business combination with one or more businesses or entities.
QETAU 0.00%↑ Quetta Acquisition Corp, a blank check company formed under the laws of the State of Delaware for the purpose of entering into a merger, share exchange, asset acquisition, share purchase, recapitalization, reorganization or similar business combination with one or more businesses or entities, which we refer to throughout this prospectus as our initial business combination.
GPAK 0.00%↑ Gamer Pakistan Inc, a development-stage interactive esports event promotion and product marketing company.
PMEC 0.00%↑ Primech Holdings Ltd, an established technology-driven facilities services provider in the public and private sectors operating mainly in Singapore.
LRHC 0.00%↑ La Rosa Holdings Corp., currently the holding company for five agent-centric, technology-integrated, cloud-based, multi-service real estate companies.
GMM 0.00%↑ Global Mofy Metaverse Ltd, a technology solutions provider engaged in virtual content production, digital marketing, and digital assets development for the metaverse industry.
BIRK 0.00%↑ Birkenstock Holding plc is the ultimate parent company of Birkenstock Group B.V. & Co. KG and its subsidiaries (the “Birkenstock Group”). Birkenstock, a German footwear manufacturer, invented the footbed and has also shaped the meaning of the term “footbed,” which is so common today.
ATPC 0.00%↑ Agape ATP Corp provides health solution advisory services to its clients. Its advisory services center, called the “ATP Zeta Health Program”, is a health program designed to effectively prevent diseases caused by polluted environments, unhealthy dietary intake and unhealthy lifestyles, and the promotion of health.