DEEP DIVE: All About S&P 500 Earnings

Earnings I: The Past

The Q1 earnings season is over, and the final numbers are in. They were better-than-expected results, which isn’t surprising when the economy is growing. Worse-than-expected results tend to occur when the economy is falling into a recession. That the economy would fall into a recession has been a widespread concern—but not our outlook, as you know. So far, so good.

Today, let’s review the results and then go back to the future by updating our forecasts for S&P 500 revenues per share, earnings per share, and the profit margin for 2023, 2024, and 2025. Then let’s conclude with a discussion of the outlook for the S&P 500’s forward earnings per share, forward P/E, and stock price index. Put on your diving suit:

(1) Revenues. S&P 500 companies’ revenues per share edged down during Q1 from Q4’s record high, but still rose 9.1% y/y (Fig. 1 and Fig. 2). Inflation boosted the growth rate, as the GDP price deflator rose 5.3%; but the inflation-adjusted increase was still a solid gain.

(2) Earnings. S&P 500 earnings per share was flat compared to Q4’s result but still down 3.0% y/y (Fig. 3 and Fig. 4).

(3) Profit margin. We can calculate the S&P 500’s profit margin by dividing the index’s earnings by revenues (Fig. 5 and Fig. 6). The margin edged up to 11.8% from 11.5% during Q4, but it was still down from the record high of 13.7% during Q2-2021.

The earnings recession has been quite modest so far, with two back-to-back quarters of modest declines on a y/y basis. There has been no revenues recession so far. The earnings weakness of recent quarters has been entirely attributable to the decline in the profit margin. This suggests that while business revenues kept pace with price inflation, profits were squeezed by rapidly rising costs. Wage inflation has been high, and productivity has been weak because of unusually high turnover in the labor market, with record-high quits and job openings in recent quarters.

Earnings II: The Present

The S&P 500 companies’ actual Q1 earnings per share turned out to be down 3.0% y/y, which was better than the -7.5% expected by industry analysts collectively at the start of the earnings season (Fig. 7 and Fig. 8). Currently (as of the June 8 week), industry analysts project that S&P 500 earnings will be down 8.1% y/y during Q2, followed by Q3 and Q4 y/y gains of 0.4% and 9.1%. Like the economy, earnings have experienced a soft landing, so far.

Currently, industry analysts are expecting the following y/y revenues and earnings growth rates: for 2023 (1.9%, 0.4%) and for 2024 (4.6%,11.4%) (Fig. 9 and Fig. 10).

The S&P 500 profit margin forecasts implied by analysts’ revenues and earnings estimates have been dropping for 2023, 2024, and 2025 since the start of this year (Fig. 11). The projections may be bottoming now, with the latest readings for the three years at 12.0%, 12.8%, and 13.6%. A bottoming of industry analysts’ implied margin estimates would suggest they believe that the mini recession in earnings attributable to weakening profit margins is over. They’ll be right if margins stop falling.

As you know, Joe and I are big fans of weekly S&P 500 forward revenues per share and forward earnings per share as great coincident indicators of the actual quarterly series for S&P 500 revenues per share and earnings per share (Fig. 12 and Fig. 13). (Forward revenues and earnings are the time-weighted average of analysts’ estimates for the current year and the coming year.) Forward revenues rose to yet another record high during the June 1 week, while forward earnings bottomed during the February 23 week and is up 3.0% since then through the June 1 week. The forward profit margin edged up during the June 1 week to 12.5% (Fig. 14).

Earnings III: The Future

Now let’s turn to an update of our outlook for the S&P 500 companies’ collective revenues, earnings, and profit margin.