Welcome to RBC’s Markets in Motion podcast, recorded October 30th, 2023. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
Today in the podcast, we take a deep dive into the stats and commentary for 3Q23 reporting season, as of late last week with 45% of S&P 500 results in.
Three big things you need to know:
- First, the S&P 500 stats simply aren’t strong enough to get the US equity market out of its recent malaise.
- Second, Small Cap trends are pretty similar to those in Large Cap, which is good for Small Caps because Large Caps no longer have an EPS advantage.
- Third, in our transcript reading the overarching theme so far is one of bending, not breaking, but the pessimistic tone is striking.
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Starting with Takeaway #1: The S&P 500 Stats Simply Aren’t Strong Enough To Get The US Equity Market Out of Its Recent Malaise
Here’s what stands out to us on the stats for the S&P 500 so far:
- For the S&P 500, the percent of companies beating consensus on EPS is 76%, a little higher than last quarter, but the percent of companies beating consensus on sales has moved a bit lower, down to 63%.
- Tech has the highest percentage of EPS beats along with Communication Services and Energy.
- The forward look is less constructive, however, as we are still seeing mostly downward revisions for full year 2023 and 2024 forecasts for S&P 500 companies.
- Most sectors are seeing a slight bias towards downward revisions on both EPS and sales forecasts, aside from Energy.
- The S&P 500 has already been pricing in a strong 2024 EPS recovery beyond what’s been embedded in consensus EPS forecasts. For now, the earnings trends that are coming through simply aren’t good enough, in our view, to help the US equity market get out of its recent malaise.
- The advantage that Growth companies have had relative to Value is shrinking quickly. This highlights one reason why, besides interest rates, crowding and valuation, Growth is stumbling relative to Value again.
Moving on to Takeaway #2: Small Cap Trends Are Pretty Similar To Those In Large Cap, Which Is Good For Small Caps Because Large Caps No Longer Have An EPS Advantage
Here’s what stands out to us on the stats for Small Caps so far:
- For the Russell 2000, the percent of companies beating consensus on EPS is also tracking a little higher than last quarter, while the percent of companies beating consensus on sales has fallen a bit.
- Health Care has the highest percentage of EPS beats, followed by Financials.
- The forward look is also less constructive for Small Caps, as we are seeing mostly downward revisions for full year 2023 and 2024 forecasts for Russell 2000 companies.
- Most sectors are seeing a slight bias towards downward revisions on both EPS and sales forecasts, aside from Energy (which is seeing positive revisions for both EPS and sales forecasts) and Health Care (which is seeing slightly positive revisions to EPS forecasts).
- Small Caps no longer look disadvantaged relative to Large Caps from an earnings perspective. Both the Russell 2000 and S&P 500 are seeing similar rates of upward EPS estimate revisions. This stands in contrast to most of 2023 when the S&P 500 was seeing stronger rates of upward EPS revisions. It remains to be seen whether this will be enough to help Small Caps bottom in performance relative to Large Caps, but it’s a still positive development for Small.
Wrapping up with Takeaway #3: In Our Transcript Reading The Overarching Theme So Far Is One of Bending, Not Breaking, But The Pessimistic Tone is Striking
As has become our custom, our team has read through most of the EPS call transcripts for the S&P 500 companies that have reported.
Key themes so far from our reading are:
- The conversations on outlooks, demand, and the general macro have generally tilted negative. Some companies have emphasized resiliency, stabilization, and normalization, but we are reading a lot more about uncertainty, challenging macro conditions, softening, and caution.
- The discussion around consumers has seemed a little more balanced between those highlighting resilience and pressures. Variability and selectivity have been recurring topics.
- Risks and negative impacts from rising rates stand out. This echoes our quant work which suggests the recent rise in 10-year Treasury yields has taken the interest rate backdrop to a trouble spot.
- Pricing discussions continue to highlight moderation and the shift of pricing from a tailwind to a headwind.
- Inflation and costs are still generally discussed as being problems.
- On labor, key recurring topics have included moderation in hiring and an improving/stabilizing backdrop. There has been a decent amount of commentary about the disruption caused by strikes.
- Geographic commentary has been mixed on Europe and tilted negative on China.
- A number of companies have referred to geopolitics and the Middle East specifically as something that could impact business conditions or adds to uncertainty.
- On GLP-1, companies have been making an effort to emphasize how there’s no clear negative impact or the impact is unclear.
- On AI, companies are spending more time in the weeds, talking about the tangible impacts seen so far, the experimentation companies are going through with it, and how it helps companies manage through macro concerns.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.