So far, so good – sort of – for U.S. earnings season


S&P 500 companies are beating earnings projections by a healthy margin. But investors should consider the caveats.


April 27, 2023

Kelly Bogdanova
Vice President, Portfolio Analyst
Portfolio Advisory Group – U.S.

On the surface, Q1 earnings season looks pretty good.

With 47 percent of companies having reported, S&P 500 earnings per share (EPS) is on pace to decline 4.2 percent year over year, better than the consensus forecast of a 6.7 percent decline at the end of the quarter, according to FactSet.

Companies are beating the earnings forecast by 6.9 percent, the highest rate since Q3 2021.

Earnings beats have bounced back in Q1 2023

Historical S&P 500 quarterly earnings beat rate and thus far for Q1 2023 (percentage point beat above the consensus forecast)

Historical S&P 500 quarterly earnings beat rate and thus far for Q1 2023

Column chart showing the quarterly S&P 500 earnings “beat rate,” which is the amount by which actual reported earnings exceed the consensus forecast for the quarter, in percentage points, from the first quarter (Q1) of 2016 through the first quarter (Q1) of 2023 (preliminary result as of April 27, 2023). From Q1 2016 through Q1 2020 (the period before COVID-19 impacted earnings estimates), the beat rate averaged 5.2%. During pandemic-related shutdowns and in the initial aftermath, when estimates and beat rates were distorted by the pandemic, the beat rate was much higher, ranging from about 9.7% to 23% from Q2 2020 through Q3 2021 (average was 17.5%). Since then, the beat rate has drifted down, first reaching about 5.5% in Q4 2021, and dropping to a low of 1.3% in Q4 2022. Thus far the Q1 2023 reporting season, the beat rate is 6.9%, which is preliminary and subject to revision as other companies report.

Source – RBC Wealth Management, national research correspondent, Refinitiv I/B/E/S, FactSet; data as of 4/27/23. Q1 2023 data is preliminary and likely to change as more companies report results.

If the strong beat rate persists during the remainder of the reporting season, our national research correspondent believes S&P 500 EPS growth could improve further and end up just slightly negative in Q1.

Revenue growth is pacing at 2.9 percent year over year, below 5.9 percent in the previous quarter.

On balance, it’s positive news, right? Well, there are a few caveats.

The Q1 bar was set rather low. In the previous quarter, EPS beat by only 1.3 percent, the worst level in many years. In other words, collectively, companies barely made it over their hurdles. We think this contributed to management teams issuing cautious Q1 guidance.

In the weeks right before the Q1 earnings season began, the proportion of companies that downgraded their earnings forecasts compared to those that upgraded them rose to the highest level in four years, according to Refinitiv I/B/E/S.

Also, wider-than-usual divergences in Q1 results have occurred within sectors, especially in the all-important Financials and technology-related groups.

Furthermore, the consensus forecast for Q2 2023 has continued to drift lower, but not by much.

These are reasons we think it’s more accurate to characterize the Q1 reporting season as “better than feared” instead of something wildly constructive.

The good news is that earnings revisions momentum for future quarters has improved across sectors since January.

Banks: A mixed bag

We had assumed there would be big differences in Q1 bank earnings due to the banking system stress in March. Some smaller and regional banks lost deposits while some larger banks ended up gathering deposits. Select banks were better able to successfully manage through the extreme volatility in their fixed income books at the time.

But the divergences were wider than we expected.

The five largest financial institutions – JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley – collectively surpassed Q1 earnings expectations by 15.3 percent, well above 6.9 percent for the S&P 500. Excluding these five heavyweights, the earnings beat rate for the rest of the Financials sector has been much more muted, according to our national research correspondent.

In our view, the quality of other banks’ Q1 results has been all over the map – some good, some mixed, and some poor. The issues that caused banks to stumble included weak net interest income, high provisions for credit losses, and reduced forward guidance.

First Republic Bank’s (FRB) results stuck out like a sore thumb. Deposits fell to US$104.5 billion from US$172 billion at year end, much lower than Wall Street analysts had anticipated. FRB also borrowed more from the Fed’s and federal emergency lending facilities than bank analysts had expected. The stock plunged further on the news and weighed on the entire bank group this week.

Given these factors, it’s no wonder the performance gap between the S&P 500 and S&P 500 Banks Industry Group has remained particularly wide throughout the reporting season, as the chart illustrates.

U.S. bank stocks lag the S&P 500 significantly, and have not narrowed the gap during Q1 earnings season

Percentage return since Jan. 1, 2022, shortly before both indexes reached all-time highs

S&P 500 Index and S&P 500 Banks Index percentage return since Jan. 1, 2022

Line chart showing the percentage change in the S&P 500 and S&P 500 Banks Industry Group since January 1, 2022. The S&P 500 peaked on January 3, 2022. The S&P 500 Banks peaked on January 12, 2022. Both indexes sold off sharply during the first half of 2022 and then traded to new lows in October 2022, with the S&P 500 down 25% and S&P 500 Banks down 30%. While the S&P 500 has recovered somewhat since then and was down 14.9% on April 26, 2023, the S&P 500 Banks has deteriorated further and was down 31.5% on the same date.

  • S&P 500 Index
  • S&P 500 Banks Index

Source – RBC Wealth Management, Bloomberg; data through 4/26/23

The gap should shrink over time, and we view the low absolute and relative valuations of the S&P 500 Banks as attractive.

But we’re realists. We think investors who own bank stocks will need to be patient as there could be additional price downside and further valuation compression before the performance gap begins to close on a sustainable basis – especially given the economic uncertainties.

The U.S. economy is losing momentum. In Q1, real GDP grew just 1.1 percent, lower than economists’ 1.9 percent consensus forecast and down from 2.6 percent in Q4 2022. Our leading indicators continue to point toward a recession later this year. Bank stocks may not be factoring in the possibilities of a full-blown credit crunch or a recession just yet.

Tech: Too early to judge

The bulk of technology firms has yet to report earnings. But here again, there has been wide divergence among those that have released results.

Microsoft, Alphabet, and Meta reported strong quarters. Micron Technology stumbled as the company’s loss was wider than the consensus forecast, its gross margin turned negative, and forward guidance was weak. Micron’s outsized loss has dampened the overall results of the broader Tech+ category (those tech-oriented stocks in various sectors).

We think mixed results among tech firms will persist as more companies report in the coming days and weeks. But this shouldn’t be surprising as the consensus forecast at the start of earnings season was for Tech+ earnings to decline 14.8 percent year over year, its worst level since 2009.

One challenge for the Tech+ category, in our view, is that valuations for some of the largest stocks are much higher than the rest of the market following the group’s strong run recently.

Recalibrate expectations

Thus far, the S&P 500 has drifted slightly lower as the “better than feared” Q1 earnings season has transpired.

Even if the earnings beat rate holds up at a high level, we anticipate Q1 will mark the third consecutive quarterly decline in earnings and the second consecutive year-over-year decline. The latter would qualify as an earnings recession.

The 2023 S&P 500 consensus earnings forecast has held steady at US$220 per share, right where it was before the earnings season began, and down from a lofty US$252 level last May. Given the economic risks, we still think it’s prudent for investors to at least factor in the possibility of US$200–$210 per share in earnings for this year, especially when it comes to assessing the market’s valuation.

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Kelly Bogdanova

Vice President, Portfolio Analyst
Portfolio Advisory Group – U.S.

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