Investing & Performance | 15 May 2023

Earnings season: what does it tell us?

Earnings season not only tells investors how well companies have performed over each quarter, it also paints a picture of future performance too. While low expectations are currently being beaten, it’s not all good news in the US.

After every financial quarter, investors and analysts eagerly wait for the largest companies to report how well their businesses have performed over the previous three-month period. Companies announce their quarterly finances, the state of their respective sectors and whether they beat investors’ initial expectations.

But not only do they announce how well they’ve done in the sales of products or services for the previous quarter, they also offer an indication of their future earnings. This allows investors to gauge whether or not they’ve over- or underestimated the value of the company before the announcement.

So how important is earnings season when it comes to investing? Well, considerably. Howard Sparks, US Equity Research Analyst at Coutts, explains: “Earnings are a fundamental building block of a company’s share price value, therefore the equity market as a whole.”

And he adds: “Like much of the world of investing, the US market is a key focus point with all eyes on the region to dictate the mood for the quarter.”


Low expectations being beaten

Coming into 2023, investor expectations on earnings for Q1 were notably low. There were predictions that US Q1 earnings would be down 7% following a 2% fall at the end of Q4 – marking an earnings recession. Signs of slowing economic activity as a result of rising interest rates, in tandem with the US banking volatility in March, made it hard to say anyone was overly optimistic heading into these announcements.

The US financial sector was one of the first to make its announcements, which included a surprise beating of low expectations. A number of banking giants posted strong results, offering a bit of reassurance to markets. In fact, the US market as a whole had a promising start, as out of the initial 82 companies from the S&P 500 that reported at that time, 75% surpassed expectations, compared to an earnings season average of 70%. This later rose to 79% of the 324 companies that reported.

One sector that had considerably low expectations coming into this season was technology. As explained in our Investment Outlook 2023, the US tech sector has been facing some difficulties since last year due to people returning to the office after Covid-19, resulting in a drop in demand for devices. Also, President Joe Biden limited sales of semiconductors from the US to China – one of its largest importers. But that said, the technology sector still managed to post surprisingly positive results in Q1 2023.

Despite expectations being beaten, business performances still haven’t swooned investors. That’s why share prices haven’t rallied as a result of this earnings season. These announcements have also coincided with other macroeconomic events such as growing stress on the US banking sector, sticky inflation and further interest rate rises, restricting the performance of leading equity indices.


What lies on the road ahead?

With most investors and analysts forecasting some disappointing performances, all to be pleasantly surprised, what does this mean for the remainder of 2023?

It’s worth remembering that expectations were low, so beating them wasn’t too difficult. In fact, earnings have still been negative, just not as much so as they were at the end of last year. This does provide some insight into how the rest of this year could go though.

Howard says: “We expect US earnings to reach their bottom in this year’s middle quarters, and could begin to recover towards the latter end of 2023. Consumer spending is still positive, as we saw in Q1 results, which is a good sign given slowing economic activity and rising interest rates.

“But with inflation easing and interest rate rises potentially on pause for now, we could be seeing a more positive outlook on future earnings seasons.”


The value of investments can fall as well as rise and you may not get back what you put in. Past performance should not be seen as an indication of future performance. You should continue to hold cash for your short-term needs.


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