All Eyes on Earnings Season: What to Expect for Q1 2023

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We are at the start of the period when companies release their results for the first quarter of 2023, known as earnings season. With everything going on—inflation, rate hikes, a labor shortage, the weakness of the dollar, a pending recession, the list goes on and on—the results are unusually uncertain this time around. Analysts are struggling to figure out exactly what all this means.

Low Expectations Abound

That may explain why those expectations are as pessimistic as they have become. As of last week, FactSet noted that the expected year-on-year change in the earnings of the S&P 500 was a decline of 6.7 percent, which would be the second quarterly decline in a row. Given the uncertainty, that decline seems reasonable. But it is inconsistent with the strong job and spending growth we saw during that quarter. What’s going on here?

Let’s keep in mind that we are at the very start of earnings season. As of last Friday, per FactSet, only 30 companies (6 percent of the index) had reported. So, we should take the data with a grain of salt. At the same time, the numbers are much better than expected so far, which suggests that current estimates might be too pessimistic.

Data Reveals Beats

So far, 90 percent of the companies reporting beat the expected earnings number. On average, over the past 5 to 10 years, 77 percent to 73 percent of companies, respectively, beat on earnings. As of now, we are doing better than usual. In terms of how much they beat by, we are at a 7.9 percent beat (or the reported earnings are 7.9 percent above the expected numbers). Again, this is consistent with the historical averages, below the 5-year average of 8.4 percent but above the 10-year average of 6.4 percent.

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