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Corporate Earnings still look strong in 2023

by Fortem Financial September 6, 2022

2023 Earnings Decline Paused For Now

After falling roughly $9 during the 2Q reporting season, the 2023 earnings estimate has stabilized at approximately $243.50, with 2023 earnings growth expected to be about 8%. However, we continue to believe that earnings estimates for 2023 are too high, and expectations will once again be revised down during the 3Q reporting season.

2022 & 2023 S&P 500 EPS Progression and Growth Rate

Financials & Discretionary Expected To Increase Their Contribution In 2023

Considering the sector contributions for 2023 estimates, it strikes us as unusual that both the financial and discretionary sectors are expected to increase their contributions given the macro backdrop. With the odds of a recession above 50% and the Fed expected to continue to raise rates to slow economic activity and anchor inflation expectations, unemployment will likely rise, which historically does not bode well for financials and discretionary earnings.

Change In S&P 500 EPS Contribution By Sector For 2023 Compared to 2022

Operating Margins Holding Up Better Than Expected

The estimated operating margin for the S&P 500 over the next twelve months remains at 16.9%, which is clearly rolling over but still holding on. Admittedly, margins have hung in much better than we anticipated they would, at least for now, but as we’ve mentioned, a downtrend in margins has not boded well for equity returns. With both equities and bonds facing challenges for investors, there are few places to allocate capital.

Estimated Next 12-Month S&P 500 Operating Margin

Energy’s Profits Keeping S&P Margins Elevated

Breaking down operating margins by sectors show that Energy and Technology are two sectors punching well above their 10-year historical average. Technology makes sense to us given the asset light operating models, but energy is more a function of elevated commodity prices. If companies remain disciplined with capex, their margins will likely remain higher than the historical averages for longer.

S&P 500 Operating Margins By Sector

Source: Strategas

Market index
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.

Sincerely,

Fortem Financial
(760) 206-8500
team@fortemfin.com

 

 

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The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
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