Fourth-quarter earnings estimates have been falling in recent weeks, with the current Refinitiv consensus predicting the first earnings contraction since the third quarter of 2020. Big banks will kick things off with results the week of Jan. 9. At the moment, Refinitiv estimates call for a 1.5% decline in S & P 500 earnings. Although this would be the first drop since 2020, there has been plenty of slowing growth prior to this earnings season. What may matter more are the first-quarter and 2023 outlooks that the companies provide. The strength of the energy sector’s profits have propped up the broader view in recent quarters. When stripping out the energy sector’s outsized impact, S & P 500 earnings have contracted the past two quarters. Q4 would have been a third-straight contraction ex-energy – and a bigger 6% decline vs. a 2% drop in Q2 and a 3% fall in Q3. Among the 11 S & P 500 sectors , seven are expected to see an earnings contraction this season. The biggest coming from materials (down 22.5%) and communication services (down 21.2%). Only energy, industrials, real estate and utilities will see growth. But even energy’s projected 64% increase pales in comparison to the astronomical rises it has seen during the past few quarters. Souring sentiment Back on July 1, fourth-quarter EPS expectations were for nearly 11% growth. That projection was halved before the start of last earnings season three months ago. And then, in the midst of the peak earnings reporting weeks, the growth rate turned negative. It has lost a little more steam since then. On the revenue front, Refinitiv expects 4.1% growth for the fourth quarter. That’s by far the weakest of the year. (Q1-Q3 ranged from up 11%-14%.) And it will be the weakest since the fourth quarter of 2020’s 2.7% growth. Food should be a bright spot Key early reporters — Adobe , Oracle and FedEx — all had decent results in recent weeks. That might provide some optimism for what’s in store during Q4 earnings season. But don’t overlook that each of those companies – along with Micron , Rite Aid and Lennar – gave more tepid guidance. There is a clear bright spot though: Food companies remain very optimistic amid strong demand and pricing power. The forward-looking first quarter and/or 2023 consensus estimates will be something to watch as companies post results and give guidance. The first-quarter earnings growth rate is sitting at a precarious positive 1.4%. It was at up 7.4% three months ago. Meanwhile, the current 2023 growth rate consensus sits at 4.4%, down from 7.7% at the start of October.
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