The third-quarter corporate earnings season is wrapping 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 investors 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. GM (GM), Coca-Cola (KO) and UPS (UPS) were a few of the iconic companies to report strong profits and sales for the third quarter. We also saw solid earnings from Apple and record profits from oil giants Chevron and Exxon Mobil.
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 results from Google parent company Alphabet (GOOGL), Microsoft (MSFT) and Facebook parent company Meta Platforms have weighed on major indexes.
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.
The economic outlook isn't great: Even after JPMorgan 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 25 companies that have raised their outlook for that period.
Analysts also aren't too cheery about the future. Fourth quarter earnings per share predictions have been revised down by 4.3% since October, according 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.
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.
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