Broker Check

The third-quarter corporate earnings season has wrapped up

November 21, 2022

The third-quarter corporate earnings season has wrapped up: We now have reports from about 450 of the S&P 500, or 90% of the index’s total membership.

Results were mostly solid, with companies from Goldman Sachs to GM reporting strong profits. But it’s all about what’s next — and companies’ projections haven’t been as rosy. The Federal Reserve’s interest rate hikes are likely to continue into 2023 as persistently high inflation rattles the economy, and recession predictions abound. Here’s what you need to know as we head into the final, potentially shaky, few months of the year and beyond.


Earnings have been strong: So far, S&P 500 earnings growth has been better than expected.

As of Tuesday morning, 69% of S&P 500 companies had beaten analysts estimates for the third quarter. American consumers may be feeling lousy, but they’re still spending –at least for now.

Companies are beating earnings estimates for the third quarter by 1.8% in aggregate, according to FactSet data. But keep in mind the bar was set low to begin with, and the beat rate is still well below the 5-year average of 8.7%.


But tech earnings have been weak: Dreary earnings results from Google (GOOGL) parent company Alphabet, Microsoft (MSFT) and Facebook (FB) parent company Meta Platforms have weighed on major indexes. This is the principal reason I moved out of the growth stocks in the managed accounts.

Beyond determining market sentiment, tech earnings also offer important clues about where the economy is heading. That’s because the industry is particularly sensitive to inflation, rising interest rates and a strong dollar. In a strong economy, tech stocks lead the market up. In a weak economy, value stocks and small cap companies lead the market up.


The economic outlook isn’t great: Even after JPMorgan (JPM), reported an earnings beat, CEO Jamie Dimon warned he was battening down the hatches for recession. “These are very, very serious things which I think are likely to push the U.S. and the world — I mean, Europe is already in recession — and they’re likely to put the U.S. in some kind of recession six to nine months from now,” Dimon said.

More than 50 S&P 500 companies have lowered earnings per share expectations for the fourth quarter, according to FactSet data. That’s compared to the 25 companies that have raised their outlook for that period. That is why I do not expect a market rally with the fourth quarter earnings reports in January.

Analysts also aren’t too cheery about the future. Fourth quarter earnings per share predictions have been revised down by 4.3% since October 1according to Bank of America analysts. That’s 2.5 times more than the typical estimate cut at this point in the earnings season. Bank of America analysts have also revised 2023 estimates down by 3.6%, almost three times more than normal.

“We continue to believe the path of least resistance for earnings estimates for the remainder of this year and into at least the first half of next year is lower,” wrote Liz Ann Sonders and Kevin Gordon at Charles Schwab. That does not change my opinion that the markets will be up over 20% next year, but it may be that we have to wait until the second quarter to see the results.


No room for grace: Investors seem to be losing patience for disappointing corporate reports more than usual, which doesn’t bode well for stocks in the final quarter of the year.

Companies that missed earnings and revenue expectations this quarter were punished sharply. Their shares underperformed the S&P 500 by 6.4% the next trading session—that’s the largest in history, Bank of America analysts said on Monday.


The big picture: Corporate America is in the midst of great economic uncertainty, and there’s nothing Wall Street hates more than a lack of clarity. We can expect more market mayhem ahead. Again, the key ingredient to predicting the market is the Fed. As long as they are raising interest rates, the markets will struggle. After they are done raising interest rates, it is all about earnings and that will take a quarter or two to recover.

 "This material is provided for general information and is subject to change without notice.  Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results.  Investors should always consult their financial advisor before acting on any information contained in this newsletter.  The information provided is for illustrative purposes only.  The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."