Q3 earnings exceed expectations

Many analysts and investors expected Q3 earnings to drop off a cliff—so the actual earnings, while not great, were a relief to the market [Mitch on the Markets] What We Learned from Q3 2022 Earnings Season With everyone’s attention locked on the U.S. midterm elections, inflation data, and projections for future Fed policy, it is easy to overlook the indicator that arguably matters the most – earnings. Going into Q3 earnings season, many feared U.S. corporations were heading towards an “earnings cliff,” fueled by a sputtering economy and persistent price pressures. But that’s not what we got.1 Instead, the overall takeaway from the Q3 earnings season was a relief, specifically that earnings were not as bad as expected. To be sure, earnings overall were not great in Q3 – in aggregate, S&P 500 companies exceeded earnings estimates by a meager 1.8%, which is significantly lower than the 10-year average of 6.5%. We also saw earnings growth of 1.6% on 11.3% higher revenues, which as you can see on the chart below continues a year-long downward trend for results. --------------------------------------------------------------- [Get the First Look at Our Just-Released Stock Market Outlook Report!]( It can be easy to get caught up in headlines that focus on attention-grabbing topics, like the ones listed above. But there are many other important factors impacting the markets, like earnings, that you should be keeping an eye on. To help you do this, I am offering all readers a first look into our just-released December 2022 Stock Market Outlook report. This report will provide you with our forecasts along with additional factors to consider: - What fundamentals are U.S. stock markets pricing in? - Setting U.S. return expectations for 2023 - Zacks forecasts at a glance - What’s ‘fair value’ on the S&P500? - And more… [Image of the report.]( If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [IT'S FREE. Download the Just-Released December 2022 Stock Market Outlook 2]( --------------------------------------------------------------- But ‘not great’ earnings are a far cry from the outright earnings cliff many were expecting. There was a narrative in the market that corporations were not lowering earnings expectations enough given the macroeconomic environment, which would in turn lead to a dramatic downshift in estimates in Q3 earnings calls – part of the so-called ‘cliff.’ Our earnings analysts at Zacks questioned this narrative though, as we had been covering the persistent cuts to forward earnings estimates over the last few months. At Zacks, we of course take earnings estimate revisions very seriously as they form the core of our stock-rating system. It follows that our analysis was showing that forward earnings estimate outside of the Energy sector peaked in April of this year, and have been steadily declining since then (see chart below). Source: Zacks Investment Research 3 Indeed, for the last seven months earnings estimates for 2023 have fallen by -7.4% for the S&P 500 index (-10.4% on an ex-Energy basis). Notably, the Technology sector has slashed forward estimates by -17.4% since mid-April and retailers have followed suit with an -18.2% reduction. The same goes for earnings estimates even just looking out to Q4, which have been progressively ticking downward as the charts below demonstrate: In my view, corporations have been doing a reasonably good job telegraphing this expected soft patch and have been setting expectations appropriately for the markets. Stocks’ reactions to earnings beats in Q3 were largely positive for this very reason, I believe. Another key takeaway from the Q3 2022 earnings season is that margins have not compressed nearly to the degree many expected. Revenues were up nicely for the quarter as companies were able to maintain pricing power in the face of rising prices, which helped preserve margins and even grow them in some cases. To date, net margins in Q3 earnings were down a modest -1.3% with 10 of the 16 Zacks sectors suffering margin contraction. But on the flip side, four sectors enjoyed higher margins relative to the year-earlier period, led by the Energy sector. This outcome is more balanced I think than many were expecting. Bottom Line for Investors The overall earnings picture in Q3 proved to be more resilient than many analysts and forecasters anticipated, which is of greatest relevance to the stock market. When actual revenue and earnings growth exceeds expectations – even by just a little as seen in Q3 – it is this performance relative to expectations that matters more than absolute earnings. In those terms, Q3 earnings can be framed as good, though not great. Looking ahead to Q4 2022 and beyond, we continue to observe companies lowering earnings estimates as we have noted since April of this year. This should be viewed as a positive, not a negative. Lowering the bar of forward earnings estimates makes exceeding expectations easier to achieve, which is generally a boon for stocks. I recommend preparing your investments by looking at key forecasts and data to guide your investing decisions. Our [Just-Released Stock Market Outlook Report]( can help you do just that. In this report, you will learn: - What fundamentals are U.S. stock markets pricing in? - Setting U.S. return expectations for 2023 - Zacks forecasts at a glance - What’s ‘fair value’ on the S&P500? - And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [Download the Just-Released December 2022 Stock Market Outlook 4]( About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. [Let's Set Up a Talk]( Don't put off planning your secure, happy retirement! Get started today by talking to a Zacks Wealth Advisor. [facebook] [linkedin] [twitter] © Zacks Investment Management | [Privacy Policy]( 1[Zacks. 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