We’re currently at the midpoint of the Q2 2023 earnings season for the S&P 500, and the results present a compelling blend of expectations and realities. As an overall trend, a larger proportion of companies are posting positive earnings surprises than usual, although the degree of these surprises is somewhat less substantial than historical averages. Despite this, there’s an overall rise in earnings for Q2 relative to last week, a critical facet of performance that’s being closely watched by investors and market participants.

Earnings Surprises

As it stands, 51% of S&P 500 companies have made their Q2 2023 results public. Out of these, 80% have surpassed their earnings per share (EPS) estimates. This performance is notably above the five-year average of 77% and the 10-year average of 73%. Cumulatively, companies are reporting earnings that are 5.9% above estimates, although this falls below the 5-year average of 8.4% and the 10-year average of 6.4%.

Sectors like Communication Services and Information Technology have been instrumental in the recent positive earnings surprises. However, there were also downward revisions of EPS estimates for a firm in the Health Care sector. Even though this impacted the overall earnings decline, it was offset by positive surprises from various other sectors.

A Closer Look at Earnings Decline

The blended earnings decline for the second quarter currently stands at -7.3%, a minor improvement from the -9.1% recorded last week but worse than the -7.0% at the end of Q2. If this figure holds, it’ll mark the largest decline in earnings for the S&P 500 since Q2 2020 when it stood at -31.6%. Additionally, this will be the third consecutive quarter in which the index has reported a decrease in earnings.

On a sectorial basis, six out of eleven sectors are showcasing year-over-year earnings growth, led by the Consumer Discretionary and Communication Services sectors. Conversely, five sectors have seen a decline in earnings, with Energy, Materials, and Health Care leading the downtrend.

Revenues and Growth Rates

In terms of revenues, 64% of S&P 500 companies have reported actual figures above estimates, a performance that trails the 5-year average of 69% but outperforms the 10-year average of 63%. On average, companies are reporting revenues 1.5% above estimates, a figure slightly below the 5-year average of 2.0% but above the 10-year average of 1.3%.

Seven sectors are reporting year-over-year growth in revenues, with the Consumer Discretionary and Financials sectors in the lead. However, four sectors are witnessing a decline in year-over-year revenues, primarily the Energy and Materials sectors.

Looking Ahead

Analysts remain positive about earnings growth for the remainder of 2023. Current projections anticipate earnings growth of 0.2% for Q3 and a more robust 7.5% for Q4. For the entire calendar year 2023, the consensus points towards a modest earnings growth of 0.4%.

The forward 12-month P/E ratio for the S&P 500 is 19.4, a figure above both the 5-year average of 18.6 and the 10-year average of 17.4. It’s also an uptick from the forward P/E ratio of 19.1 recorded at the end of the second quarter.

Over the coming week, we expect to see further clarity as 170 additional S&P 500 companies (including four Dow 30 components) are scheduled to report their second quarter results. The way these firms perform will provide more insight into the overall health of the market and could significantly influence trends for the remainder of 2023.

-Data via FactSet