The Second Quarter: The Trough Quarter

Expected Earnings Decline in Q2

The second quarter is anticipated to experience a 6.8% decline in earnings compared to the same period last year, according to Refinitiv. This is expected to be the lowest point in the current earnings cycle. However, estimates for the rest of 2023 and into 2024 are significantly higher.

Sector Outlook

Consumer discretionary, communication services, and industrials are expected to see increased earnings this quarter, while information technology is expected to remain flat. On the other hand, commodity-based sectors like energy and materials, as well as health care, are expected to face declines.

Better-than-Expected Results

Despite initial concerns, current results are slightly exceeding expectations. Around 80% of companies are beating earnings estimates, which is slightly higher than the historical average. The average beat is 6.4%, surpassing the prior four-quarter average of 4.2%.

Importance of Forward Profit Estimates

For stock prices, what matters most is how future earnings estimates are changing. Guidance for the future is more relevant than past results. The overall earnings trend for the S & P 500 this year has seen estimates initially higher, but gradually coming down. However, estimates have now stabilized and are no longer declining.

The Continued Impact of AI

The AI revolution was a major theme in the first half of 2022, driving up the S & P 500. While some believe the story is losing steam, analysts like Dan Ives from Wedbush remain bullish on the AI sector. He expects the benefits of AI to extend to other companies, predicting a positive market outlook for tech.

Is “Disinflation” a Concern?

Reports indicate lower volumes for certain companies and pricing challenges for others. This may lead to margin pressure and potential cost-cutting measures. However, the full impact of this trend may not be felt until later in the quarter and the year.