Q3 2023 Earnings Quick Takes
We’re roughly halfway through corporate earnings season for Q3 2023, and results have been largely mixed. However, one thing is clear – there is little visibility to what is coming around the corner.
End market demand seems to be increasingly uncertain; while U.S. retail sales showed strength in the quarter, most other sectors have reported variable demand. At the same time, the economy is showing resilience with GDP growing at 4.9% year-over-year in the quarter, the fastest in almost two years.
Guidance revisions have been widespread; amongst those that have revised, many have lowered revenue outlooks, with a few of these companies simultaneously raising earnings outlooks. Within the S&P 500, an above-average percent of companies are beating earnings estimates, yet a below-average percent are beating revenue estimates. Interestingly, in the same group, even those companies reporting beats versus earnings estimates are seeing an average share price decrease of 1% two days post-earnings announcement.
Across all sectors, cost optimization and efforts to drive efficiencies are consistent themes as companies look to to support profits and cash generation amidst pressured top-lines.
Industrials: Reporting top-line pressure, generally solid earnings
- In the industrial space, reported revenues are generally lower than estimates while profits are meeting or beating expectations. Manufacturers have continued to report easing of supply chain headwinds, with some moderation of other input costs that pressured profits in the past (including commodities, fuel, and freight).
- Consumer discretionary products, particularly the recreation space, continue to see declines as interest rates weigh on consumer demand.
- Customer inventories are an increasing focus; many are reporting ongoing normalization of inventories to “healthy” levels to match softening demand.
- The impact of the UAW strike has been a headline for any company with exposure to automotive OEMs. Many are noting limited impact to third quarter results but are anticipating an impact to the fourth quarter, modifying full-year guidance accordingly.
- Cutting costs and creating new operating efficiencies remains a key focus to offset the impact of lower revenues on the bottom line.
Banks and financial services: Showing relative strength for larger banks, with many delivering profitable growth owing to increased interest income.
- Many larger banks beat both revenue and EPS forecasts, reporting sequential expansion in net interest margins.
- Smaller banks have not fared well as higher interest rate payments for deposits have outpaced income from higher rates charged on loans, combined with the potential for increased capital requirements coming out of the Signature Bank and Silicon Valley Bank collapses earlier this year.
- Delinquency trends are “normalizing”, edging up to pre-pandemic levels, as noted by Bank of America and JP Morgan.
- Continued focus on cost-cutting measures (reorganizations, headcount reductions, contract negotiations, operational efficiencies).
Tech: Solid revenue and earnings beats by top players (Alphabet, Amazon, Microsoft, Meta) yet the market remains unimpressed.
- AI has remained the belle of the ball, with investors looking to understand which companies are best positioned to capture growth opportunities as the technology develops. Google missed expectations within its cloud business, driving shares down despite solid overall performance in the quarter.
- Macro concerns are an overhang; forward-looking themes included potential weaker advertising revenue due to rising tensions in the Middle East, along with rising interest rates continuing to weigh on customer spend.
- Cost optimization is a major focus area (notably, some form of the term “optimize” was mentioned over 20 times on Amazon’s conference call) as tech giants manage through customers’ cost-saving initiatives.
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