SNAPSHOT2 min read

What have we learned from the US earnings season so far?

Some companies have seen sharp share price falls but it’s not been all bad news for big tech.



Emma Stevenson
Equities Correspondent

Last week was an eventful one for stock markets as several of the world’s largest companies unveiled disappointing quarterly results.

Meta, parent company of Facebook, sprang perhaps the biggest unwelcome surprise amid an advertising slowdown combined with rising costs. These costs included large investments in artificial intelligence (AI) and the metaverse.

Amazon and Microsoft also disappointed market forecasts, partly due to a slowdown in demand in their cloud computing businesses.

All three companies have underperformed the wider US market this month, significantly so in the cases of Meta and Amazon.

Tina Fong, Strategist, said: “The US earnings season has been uninspiring so far with EPS growth for Q3 missing expectations by over 1%. The market has severely punished those companies that have failed to meet consensus estimates, such as some of the big tech giants.”


Global equities portfolio manager Frank Thormann said: “The big tech losers in the US were Meta Platforms and Amazon, due to weak outlooks as well as weak earnings.

“Looking further afield, Chinese stocks – particularly the tech sector - had a weak October due to rising macroeconomic concerns and negative investor interpretation of the Party Congress. In addition, we are seeing increasing profit warnings from the semiconductor sector.”

That said, it hasn’t all been bad news for big tech this quarter. Apple posted a slight rise in earnings and other tech stocks performed well too.

“There was no widespread tech sell-off in October,” Frank Thormann said. “Positive tech stand-outs include Netflix, where investors are excited about the new ad-supported subscriber offering and a resumption of growth in subscribers in Q3”.

News from certain other sectors has been encouraging too.

“The energy companies have seen their profitability surge thanks to the higher oil price,” said Tina Fong. “Some consumer names are also still benefitting from pricing power and beating consensus expectations.”

Pricing power refers to a company's ability to raise prices without reducing demand for their products.

Alex Tedder, Head of Global and Thematic Equities, said: “Companies with good cashflows, solid business models and the ability to raise prices to offset inflation are faring best in the current volatile markets.

“PepsiCo is one example of a company demonstrating pricing power over recent quarters, putting through price rises in Q2 and Q3 this year.”

Frank Thormann added: “Some electric vehicle battery makers, such as Samsung SDI in South Korea, have also posted very strong quarterly results.”

The Q3 earnings season is still ongoing. So far, of the S&P 500 companies that have reported as of 31 October, earnings are up 2.5% year-on-year (y/y). For those still to report, consensus estimates are looking for 7.2% growth y/y (source: Schroders Economics Team, Eikon, as at 31 October).

Market earnings forecasts may be over-optimistic

For many of the companies mentioned above, the current quarter will be even more critical for their 2022 earnings and 2023 outlook. The Thanksgiving and Christmas periods are especially important for consumer-oriented firms like Amazon and Apple.

With consumers paying higher prices for essentials such as food and energy, and interest rates still going up, corporate earnings may suffer.

“Earnings guidance for the reporting companies over the coming quarters have generally come down, but not enough to account for the prospect of an US recession next year, said Tina Fong”

It does seem that market estimates may be overly optimistic about corporate earnings for next year in particular.

“It’s instructive to look at the wider context,” said Frank Thormann. “In 2018 and 2019, earnings per share (EPS) for the S&P 500 was $150. Then in 2020 there was a decline down to $125 due to the pandemic.

“In 2021 there was an extremely strong recovery, taking EPS to around $193, and that momentum continued into Q1 and Q2 this year as well. By the midpoint of this year, consensus expectations for 2022 EPS for the S&P 500 were around $230.

“More recently, forecasts had been pointing to a growth slowdown for Q3, but with a re-acceleration after that. Before the start of the current earnings season, analysts were forecasting a further 10% earnings growth in 2023.

“Those figures represent a ‘blue sky’ scenario. Even prior to the results we’ve seen so far for Q3, my expectations were lower.”

This suggests there could be more downgrades to come, but stock markets usually price in such downgrades before they happen.

“We think corporate earnings are likely to trough around the middle of next year,” Alex Tedder said. “The market typically starts to price in earnings six to nine months ahead. So we may already be approaching the point where this is reflected in valuations and that will create a floor for equities.”

Finally, aside from profits and share price performance, this quarterly earnings season may also shed some light on the labour market outlook.

Tina Fong said: “Tech companies are coming under increasing pressure to cut costs. This is likely to mean job cuts which would hit the labour market as this sector has been one of key contributors to the strong jobs growth in the US.”


Emma Stevenson
Equities Correspondent


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