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Second-quarter earnings season is set to commence this week, and the outlook appears grim. Forecasts indicate a third consecutive quarter of declining earnings. According to consensus estimates from UBS, S&P 500 companies are projected to experience a decline of approximately 7% in earnings per share compared to the same quarter last year, which would mark the sharpest decline since 2020.
Among the 11 sectors, only Consumer Discretionary and Communications Services are expected to witness substantial growth in second-quarter earnings. In a noteworthy trend, S&P 500 companies are anticipated to encounter no year-over-year revenue growth for the first time in 10 quarters, as indicated by Goldman Sachs.
David Kostin, Chief Equity Strategist at Goldman Sachs, noted that the US economy has maintained robust growth since the beginning of the second quarter, driving most of the sales growth according to their top-down model. However, weaker commodity prices and falling inflation may pose additional challenges to S&P 500 sales growth, limiting firms’ pricing power.
Investors are likely to scrutinize the AI sector more closely, as the promises of AI-led gains during the previous earnings season come under examination. Goldman Sachs suggests that this quarter will reveal whether those AI promises are translating into significant profits and when such profits can be expected. Additionally, the health of the consumer and the state of the financial system following the spring’s banking crisis will be key themes to monitor.
Amidst an overall decline in earnings, there is potential for stocks to rise if initial estimates are sufficiently low. Analysts hold varying opinions on whether this is the case. Goldman Sachs and UBS both highlight a “low bar” for second-quarter earnings. Goldman Sachs believes companies will be able to meet this bar, while UBS predicts a less than 1% earnings-per-share miss below the low bar.
Evercore ISI suggests that some stocks face a relatively lower threshold for exceeding expectations. However, for tech stocks in general, Nvidia’s AI surge following last quarter’s report has set a high standard. Julian Emanuel, a strategist at Evercore ISI, emphasizes that in the previous quarter, companies experiencing earnings beats saw fewer positive reactions in the 24 hours after reporting, while companies that missed estimates witnessed significant downward stock reactions.
Despite the prevailing challenges, a silver lining is expected in the second earnings season. Both Goldman Sachs and UBS use the term “bottom” in their Q2 earnings previews, suggesting that the second quarter of 2023 might be the peak of unfavorable year-over-year earnings comparisons. Kostin from Goldman Sachs points out that, in the long run, S&P 500 returns often align with forward-looking expectations for earnings.