S&P 500 2023 Q2 Earnings Review: Revenues Miss Analyst Expectations

By Tajinder Dhillon

As we exit the peak period of earnings season, we review the S&P 500 2023 Q2 earnings season in more detail, providing both aggregate and company-level insights using data from I/B/E/S, StarMine, and Datastream, which are all found in the desktop solution Refinitiv Workspace.

Heading into earnings season, we asked if Q2 would mark a ‘repeat performance’ off the back of a strong Q1 season. Q1 and Q2 had a remarkably similar setup heading into earnings season with negative revisions heading into earnings season combined with concerns about the economy, margins, among other issues. Q2 was forecasted to be the ‘trough’ in 2023 earnings with the bulk of growth expectations to occur in the back half of the year (Q4 in particular).

As highlighted in our 2023 Q2 Earnings Preview last month, analysts moderately set the bar lower heading into earnings season compared to previous quarters. Q2 was a resilient quarter on the earnings front (again) which saw both a beat rate and an earnings surprise rate reaching a multi-quarter high. Q/Q earnings growth was also positive for the second consecutive quarter. Ex-energy year-over-year (y/y) growth also turned positive after four quarters of negative growth, highlighting improved breadth in earnings growth. All in all, earnings growth in the first half of the year turned out better than originally forecasted.

This contrasts to a weaker revenue quarter which saw the revenue beat rate reach a multi-year low along with an in-line revenue surprise rate. The revenue beat rate was the lowest since 2020 Q1 and will be a trend to monitor in Q3 given the debate around pricing power and the follow-through impact on margins. Y/Y revenue growth also reached a multi-year low, due to difficult year-over-year comps. Finally, real revenue growth (adjusted for inflation) was negative in Q2.

Part 1 - Earnings and Revenue Beat/Surprise Rate

Using data from the August 11^th S&P 500 Earnings Scorecard, 91.2% of companies have reported results (90.8% of aggregate earnings). Of the 456 companies that have reported, 78.7% reported earnings above analyst expectations, which surpasses the prior four-quarter average of 73.4% and well above the long-term average of 66.4%. This was the highest earnings surprise rate since 2021 Q3.

At a sector level, eight sectors posted earnings beat rate above both their prior four-quarter average (Energy, Industrials, and Real Estate did worse relative to their sector averages).

From a breadth perspective, we calculate the following datapoints (of the 456 companies that have reported earnings):

• 55.0% of constituents reported both an earnings and revenue beat. This was led by Health Care, Information Technology, and Consumer Discretionary.
• 11.0% of constituents reported both an earnings and revenue miss. This was led by Materials, Utilities, and Industrials.

The aggregate earnings surprise factor (actual vs. mean estimate on the day of reporting) of 7.7% reached a multi-quarter high and is well above both the prior four-quarter average of 4.2% and the long-term average of 4.1% (Exhibit 1). The largest contributors to the earnings surprise rate are as followed: JPMorgan Chase & Co (JPM), Amazon.com Inc (AMZN), Berkshire Hathaway Inc (BRK.B, BRK.A), Microsoft Corp (MSFT), Apple Inc (AAPL), General Motors Co (GM), and Intel Corp. (INTC). This group contributed roughly one-third of the overall earnings surprise this quarter.

The aggregate revenue surprise of 1.8% is below the prior four-quarter average of 2.2% and above the long-term average of 1.3%.

From a breadth perspective, we calculate the following datapoints (of the 456 companies that have reported earnings):

• 34.2% of constituents reported an earnings surprise above 7.7%.
• 6.1% of constituents reported an earnings surprise below -7.7%.
• 38.4% of constituents reported a revenue surprise above 1.8%.
• 18.6% of constituents reported a revenue surprise below -1.8%.

Exhibit 1: S&P 500 Earnings Surprise Factor

Part 2 - Earnings and Revenue Growth/Contribution

Q2 blended earnings are currently $448.0 billion (-3.8% y/y, +1.6% q/q). This marks the second consecutive quarter of positive q/q growth and is expected to continue into the rest of the year according to analyst estimates (Q3: +3.5%, Q4: +3.4%).

The ‘Magnificent-7’ saw Q2 earnings of $67.1 billion (+38.5% y/y, +11.4 q/q). This group consists of Apple Inc., Amazon.com, Inc., Alphabet Inc. (GOOG, GOOGL), Meta Platforms, Inc. (META), Microsoft Corp., NVIDIA Corp. (NVDA), and Tesla, Inc. (TSLA).

Q2 saw a ‘v’ shaped pattern in the bottom-up EPS estimate (Exhibit 2), which saw analysts lower the bar moderately heading into earnings season with a starting growth of -5.7% at the start of earnings season and improved by 190 basis points to -3.8%.

The intra-quarter improvement in earnings growth of 190 bps is higher than the prior-four quarter average of 160 bps and below the long-term average of 310 bps. Excluding energy, earnings growth is +2.5% y/y, which is the first positive quarter after four prior quarters of negative ex-energy growth.

Exhibit 2: S&P 500 2023 Q2 Bottom-Up EPS

Exhibit 3 displays Q2 earnings growth in terms of earnings growth contribution, which provides a clearer way to understand which sectors were driving earnings growth.

Heading into the quarter, six sectors were expected to deliver positive earnings growth contribution, which was offset by Information Technology, Materials, Health Care, and Energy - this can be seen in the blue bars.

The black bars (current values) show that eight sectors delivered stronger earnings growth compared to the start of the earnings season. Consumer Discretionary saw the largest relative increase, followed by Information Technology and Industrials.

Exhibit 3: S&P 500 Earnings Contribution

On an absolute basis, we also show a list of the individual companies that had the largest positive (negative) earnings growth contribution this quarter (Exhibit 4).

Exhibit 4: Earnings Growth Contribution by Individual Company

Looking at revenue, Q2 revenue is $3,705 billion (+0.4% y/y, +1.8% q/q). Y/Y growth has increased by 1.0 ppt since the start of the earnings season. Excluding energy, revenue growth improves to 4.3% y/y. The ‘Magnificent-7’ saw Q2 revenue of $344.6 billion (+9.8% y/y, +2.2 q/q).

Exhibit 5 is a replica of Exhibit 3 except we show the current quarter revenue growth contribution. Seven sectors saw their relative revenue growth contribution increase this quarter, led by Health Care, Financials, and Consumer Discretionary.

From a breadth perspective, we calculate the following datapoints (of the 456 companies that have reported earnings):

• 47.6% of constituents reported an earnings growth rate above 5.0%.
• 34.4% of constituents reported an earnings growth rate below -5.0%.
• 55.7% of constituents reported a revenue growth rate above the Q2 average inflation rate.
• 24.6% of constituents reported a revenue growth rate below the Q2 average inflation rate.

Exhibit 5: S&P 500 Revenue Contribution

Part 3 - Net Profit Margin Expectations

Net profit margins peaked in 2021 Q2 (12.9%) and then declined for six consecutive quarters to 10.7%.

The Q2 blended net profit margin (combining estimates and actuals) is 11.1%, a slight tick-up from 11.0% at the start of the earnings season (Exhibit 6).

Real Estate saw the largest increase in profit margin expectations this quarter (190 bps), followed by Consumer Discretionary (120 bps), and Information Technology (100 bps). Health Care saw the largest decline (-130 bps) followed by Financials (-50 bps), and Energy (-40 bps).

At an Industry Group level (Exhibit 7), Consumer Services (650 bps) saw the largest increase this quarter, followed by Transportation (510 bps), and Equity Real Estate Investment Trusts (440 bps). Pharmaceuticals, Biotechnology & Life Sciences (-760 bps) saw the largest decline this quarter, followed by Energy (-270 bps), and Insurance (-160 bps).

From a breadth perspective, we calculate the following datapoints (of the 456 constituents that have reported earnings):

• 60.3% of constituents saw their net margin increase vs. the prior quarter.
• 26.5% of constituents saw their net margin increase for two consecutive quarters.
• 5.9% of constituents saw their net margin increase for three consecutive quarters.
• 39.3% of constituents saw their net margin decrease vs. the prior quarter.
• 15.8% of constituents saw their net margin decrease for two consecutive quarters.
• 7.5% of constituents saw their net margin decrease for three consecutive quarters.
• 3.9% of constituents saw their net margin decrease for four consecutive quarters.

Exhibit 6: S&P 500 Net Profit Margin

Exhibit 7: 2023 Q2 Net Profit Margin (Industry Group)

Part 4 – Which companies have seen the largest revisions for the next quarter?

Using the Screener app within Refinitiv Workspace for Analysts and Portfolio Managers, we can gain valuable insights into how analysts have reacted after a company releases its financial results. Exhibit 8 shows the 30-day percent change in the consensus mean EPS estimate for 23Q3 (i.e., the next upcoming quarter).

Exhibit 8.1 is sorted by the largest downward earnings revisions for companies that have already posted results for the current earnings season period (column highlighted in blue). Said differently, we can see how analysts have revised estimates for the following quarter once a company reported results. Note: values less than -100% occur when an EPS estimate turns from positive to negative.

Exhibit 8.2 is sorted by the largest upward earnings revisions.

We also add additional columns of data for further insight - the first column shows the StarMine Analyst Revision Model (ARM) score. ARM is a stock ranking model designed to show current analyst sentiment and predict future analyst revisions by looking at estimate revisions across EPS, EBITDA, Revenue, and Recommendations over multiple time periods. We note a strong correlation between the 30-day percent change revision in consensus EPS vs. ARM score (i.e., companies that have seen their consensus EPS rise (or fall) significantly are typically associated with a high (low) ARM score.

The next two columns show the number of analysts who have upgraded or downgraded EPS estimates for the next upcoming quarter. Finally, we display the expected report date for the next quarter along with the StarMine Predicted Surprise (PS). The PS is a powerful quantitative analytic that compares the StarMine SmartEstimate to the consensus mean. The SmartEstimate places a higher weight on analysts who are more accurate and timelier, thus providing a refined view into consensus. Comparing the SmartEstimate to the mean estimate leads to our PS, which accurately predicts the direction of earnings surprise 70% of the time when the PS is greater than 2% or less than -2%.

The screener app provides a powerful workflow tool for Analysts and Portfolio Managers looking to parse through hundreds of companies during earnings season to identify thematic trends.

Exhibit 8.1: 30-day Revision (Negative) for the upcoming quarter

Exhibit 8.2: 30-day Revision (Positive) for the upcoming quarter

Conclusion

Q2 saw another resilient quarter on the earnings front, which saw a multi-quarter high in both the earnings beat rate and earnings surprise rate. All things considered, half-year results have been better than expected, which is encouraging as the bulk of 2023 growth expectations sits in the second half of the year (Q4 in particular).

Looking ahead to next quarter, Q3 guidance numbers have started off more negatively compared to last quarter. There have been 63 negative announcements compared to 32 positive announcements, resulting in a negative/positive ratio of 1.9.

The biggest takeaway this quarter is that for the first time since the pandemic, we saw fewer companies beat revenue expectations which will be a concern given the debate around pricing power and how long that will last post-pandemic. Furthermore, real revenue growth (adjusted for inflation) was negative for the third consecutive quarter.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.