Raymond James
- The S&P 500 earnings recession has officially ended following third-quarter earnings results.
- An estimated 5% jump in EPS ended a losing streak for profits that began in late 2022.
- "Third quarter earnings season results suggests that the outperformance is backed by healthy fundamentals," Raymond James said.
Our Chart of the Day is from Raymond James, which shows that the S&P 500's earnings recession has officially ended.
So far, 92% of S&P 500 companies have reported their third-quarter earnings results. Of those companies, 82% beat profit estimates by a median of 7%, while 59% beat sales estimates by a median of 3%, according to data from Fundstrat.
The results put the S&P 500 on track to see third-quarter year-over-year profit growth of 5%, which is well ahead of analysts estimates for flat growth just four months ago.
"If sustained, this would be the best quarter of earnings growth since [the] second quarter of 2022," Raymond James said.
The past three quarters had seen earnings per share yearly declines of -4%, -1%, and -3%. Despite the earnings recession, the S&P 500 has surged 15% year to date.
Much of the strength seen in the S&P 500 this year has been driven by the rise mega-cap tech stocks, and for good reason.
Raymond James found that Microsoft, Apple, Alphabet, Meta, Amazon, and Nvidia, or MAGMAN, saw year-over-year earnings growth of 55% in the third-quarter, and is expected to see full-year 2023 profit growth of 35%.
"Additionally, MAGMAN beat estimates by ~20% in [the] third-quarter, nearly triple the beat of the S&P 500. So, while MAGMAN has seen robust performance, third quarter earnings season results suggest that the outperformance is backed up by healthy fundamentals," Raymond James said.
But when you exclude MAGMAN from the index, the S&P 500 saw an earnings decline of about 1% in the third-quarter.
Meanwhile, investors shouldn't rely on stock buybacks to drive future profit growth, in part thanks to higher interest rates.
"Buybacks have slowed for three consecutive quarters, now ~50% below their first-quarter [of] 2022 peak. With the economic outlook likely to be more challenged and interest rates at multi-year highs, buyback activity will likely shrink further," Raymond James said.
Despite the lack of stock buybacks in the coming quarters, analysts expect profit growth to continue into 2024, with earnings per share gains accelerating to 11% by the second quarter of 2024.