Behind the Numbers: S&P 500 Earnings Breakdown | Episode 068 | 11-07-23

In the latest episode of Markets with Megan, Chief Investment Officer, Megan Horneman discusses the positive turn in the third-quarter S&P 500 earnings season, with a 5.7% earnings growth. She talks about which sectors are leading the charge and why this might be good news for the equity market. Megan also shares insights on the common practice of companies lowering expectations before earnings season, leading to many surpassing their estimates. However, Megan mentions concerns about the future, as earnings estimates for 2024 and 2025 remain unchanged, despite the possibility of a recession.

Hello, this is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors. We're coming to you today with our regular segment of Markets with Megan and we want to talk a little bit about the third quarter S&P 500 earnings season, which is wrapping up. We've got about 80% of the companies in the S&P 500. They've reported earnings and it looks like the earnings recession that started in 2022 is finally behind us. We have earnings growth. Right now.

It's on pace to be about 5.7% for the quarter. It is led by primarily two main sectors, and that is the consumer discretionary sector as well as the communication sector, and within the communication sector, we are looking at that being concentrated in, for example, meta. So we're not looking at really a broad-based increase. This is concentrated in select names Financials they've been relatively resilient. Financials are looking to show about 22% of earnings growth. Again, that is more of a concentrated story. J P Morgan and Wells Fargo are making up the majority of that from an earnings perspective.

But when you look at these numbers, it's not surprising to us that they're positive, even though, coming into the quarter, the expectation was for a slight negative year-over-year earnings growth. Typically, companies do come in and cut ahead of earnings season just so they have a lower bar to beat. So we typically do see earnings come in about 3% to 5% better than is expected at the beginning of the earnings season. Regardless of that, we are looking at a pretty big, strong as far as percentage of companies that are beating over 80%. That's the best since 2021. And we are looking at positive earnings growth. So that's good news from an equity perspective.

But what we are a little bit more concerned about is going into next year, in 2025, because both of those earnings estimates have not really budged and we still do anticipate that a recession is unavoidable. So we may need to see some more downward revisions in these earnings estimates both 2024 and 2025. Right now, the estimate is that the S&P 500 earnings will grow about 12% each year. That is, I think, a little bit too optimistic given the expectation and especially the recession that's unavoidable and now is being pushed into early 2024. So we'll be back with any more information about earnings as it comes due, but if you have any questions or comments, please feel free to reach out to podcast at Verdence dot com. Thank you.