The 3Q 2022 reporting season is in its final stages in the United States and in the Eurozone. In the US, earnings are higher by 4% y/y, marking the return to modest growth after the exceptional results achieved in the post-Covid period. The major positive surprises seen in the previous seasons were not matched. The percentage of companies that beat forecasts is slowing and is in line with the historical average.
During the earnings season, analysts have significantly lowered their forecasts for the end of 2023, in view of the expected slowdown of economic growth, and in light of the indications on future performance provided by companies (in the technology sector in particular).

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Corporate earnings in 3Q 2022

The corporate earnings reporting season is coming to an end. S&P500 companies posted higher earnings by 4% y/y (from 8.5% in 2Q), beating the forecast, that had nonetheless been cut sharply to 2.5% in weeks leading up to the start of the reporting season. Therefore, profit growth was modest, after the exceptional results achieved in the post-Covid period. 
Furthermore, the percentage of S&P500 companies that beat forecasts continued to decrease from the post-pandemic peak, levelling off at 71% in 3Q, down sharply compared to previous reporting seasons, to levels in line with the long-term average.
Revenue’s growth remains sustained, at 11% y/y (vs. a forecast of 8.5% at the opening of the reporting season). While revenues have slowed (with multinationals hit hardest by the appreciation of the dollar), they have remained higher than in the pre-pandemic period, still benefiting from high final prices. 

By sector, the largest upside surprises came from energy, consumer staples, and pharmaceuticals, as opposed to disappointing performances in commodities, telecommunication services, and discretionary consumer goods (more affected by the erosion of purchasing power due to high inflation). 
Traditional sectors, such as the industrial, are proving resilient. Despite the macroeconomic slowdown, investment spending (non-residential) remains sustained, in a context of re-shoring, while staff shortages and wage growth increase the need to improve automation processes.
The technology sector achieved strong results in terms of earnings surprises, but guidance was disappointing. In particular, technology mega caps are feeling the effects of the global slowdown and of the strong dollar, while earnings are returning to levels in lien with the long-term trend, after the excesses of the “stay at home” boost of the pandemic period.

European companies showing resilient earnings (albeit inflated by the energy sector), posting stronger corporate results than implied by macro conditions as outlined by leading indicators such as the PMI indices. European companies continued to benefit from the depreciation of the euro and from the long wave of reopenings. However, these results will be hard to sustain over time, with focus shifting from inflation to the resilience of demand and to recession risks.


Future earnings outlook 

In a reporting season in which surprises were back in line with the long-term average, forecasts for end-year results have been lowered substantially (also in light of the guidance provided by companies), and even more so for 2023, when the evolution of earnings should increasingly reflect the effects of the macroeconomic slowdown.
Analysts expect earnings growth on the S&P500 index to drop to close to 0% in the closing quarter of the year. Downward revisions affected all sectors, and in particular commodities, telecommunication services, and discretionary consumer goods.

Forecasts for next year have been revised down on almost all the major markets: the sharpest cuts were concentrated on S&P500 companies in the US, expected to post modest earnings growth by 4%, down from 7.2% as estimated at the start of the season. Forecast earnings growth for Eurostoxx companies (2.6%) are now outlining a quasi-stagnant trend, despite the revisions being more contained (initial estimated growth of 3.4%). Emerging country companies underwent similar forecast reductions.

Forecasts for 2024, on the other hand, remain close to where they were at the start of the season.
The fact that forecasts are starting to price in the macro slowdown is reassuring. For the time being, however, forecasts are pricing in neither fears of a sharp decline of economic activity, nor of a recession.

Market performances during the reporting season

Since the opening of the earnings season (mid-October), risk assets have been posting excellent performances (although the trend since the beginning of the year remains negative), hand in hand with the moderation of government bond yields. The only negative performance was the dollars, that retraced in part from the major upswing observed since the beginning of the year.
The market recovery was driven by the probability of a change in pace by the Fed, a “calibration” of monetary policy after months of aggressive restriction. Expectations for a slowdown in the pace of fed funds rate hikes were supported by the lower-than-expected inflation reading for October. 

By individual name, on the other hand, market reactivity to weaker than expected results was significant in any case. Vice versa, positive results were taken with caution by a market now focused on the future earnings outlook, made more uncertain by the monetary tightening and by the economic slowdown.
Lastly, the fact that the exit from the buyback blackout period (that precedes the release of results and lasts until two days after their disclosure) comes a few months before the introduction, starting in January 2023, of the 1% tax on buybacks, could result in an increase in own stock purchases at the close of the year.


Stock market valuations 

The downturn of the stock markets in the course of 2022, that materialised while earnings continued to grow, has sharply pushed down valuations (P/E, price-earnings ratio). 
Valuations are back at historically appealing levels: multiples on the EuroStoxx and on the Emerging market stock indices are well below their long-term averages, and S&P500 multiples are also back in line with pre-Covid levels, and close to their long-term averages.

A conservative revision of valuations should buffer the impact of future cuts to earnings forecasts, that will accompany the macroeconomic slowdown.
However, market volatility will depend on the size of the slowdown. A soft-landing scenario, with stabilising rates and signals of easing inflation, would allow the stock markets to recover promptly, considering that analysts have already started to cut forecasts. Vice versa, a sharper slowdown would result in lower bond rates, while postponing the recovery of stocks in waiting for further downward revisions.