Q1 Earnings Slide Thought to Be Rock Bottom

First quarter 2023 earnings are a downer—with profits expected to fall 6.2% compared with the year-prior period, the largest drop since the pandemic-ridden Q2 2020 (which was off 31.6%). But a batch of positive earnings surprises have brightened analysts’ outlook for coming quarters, according to FactSet Research Systems Inc.

While only about 20% of S&P 500 companies have announced results, some three-quarters of those have reported earnings per share above estimates. FedEx ($3.41 EPS versus $2.71), Citigroup ($2.19 versus $1.65) and homebuilder Lennar ($2.06 versus $1.55) are among those that beat analysts’ expectations. Of the companies reporting thus far, 5.8% are beats, which is pretty good, albeit below the 10-year average of 6.4%.

As a result, analysts surveyed by FactSet project a smaller loss in Q2 (down 5.0%) and then a return to growing EPS, up 1.6% in Q3 and 8.5% in Q4.

To be sure, it sounds risky to expect the rest of Q1 earnings to stay close to the early results. But experts note that the early reports often are indicative of what will follow. Profit margins are holding up, relatively speaking, at 11.2% this year, just below 2022’s first period, 12.2%.

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The unspoken (at least by FactSet) risk is that the long-anticipated recession will strike later in the year, sending EPS cascading steeply.

Should earnings indeed dip by 6.2% this quarter, that will mark the second straight quarter of EPS declines. Yet some sectors are doing well, despite the negative earnings outlook for the S&P 500 overall. Thus far this season, companies that beat estimates have logged an average 2.2% stock price increase in the five days centered on their earnings release. For those that missed their estimate, the average drop was 2.5%.

The financial sector has an expected earnings increase of 5.4%, up from a previous estimate of 2.9%. The energy sector has reported the biggest slide, to 6.5% from 9.4%, owing to dropping oil prices in April and even sharper falls in natural gas all this year.