The corporate earnings season for the third quarter can be considered disappointing overall. In the US, however, there is at least growing hope that the worst of the earnings recession may be over, while Europe is lagging behind this trend.
In the United States, over 92% of S&P 500 companies have now published their results for the third quarter. After three consecutive quarters of declining earnings growth in the S&P 500 (Q4 2022, Q1 2023 and Q2 2023), Q3 finally saw a return to positive earnings per share growth of 4.1% year-on-year. This is around 5% above expectations at the start of the reporting season.
The number of positive earnings and sales surprises is largely in line with historical averages. This contrasts with a disappointing ratio of positive to negative company outlooks, which has settled at its lowest level since June 2019. It is also interesting to note that planned corporate investments declined overall for the first time in ten quarters, although this picture is heavily distorted by two technology-related companies. Excluding these, capital expenditure plans remain slightly in positive territory.
Furthermore, share buyback programs - primarily a phenomenon of the low interest rate years following the great financial crisis - fell by 3% year-on-year, although this represents a sequential improvement on the previous quarter, when they were 26% lower than in the same quarter of the last year. There are signs of a slowdown in financial engineering, i.e. taking on debt to buy back own shares. This has become significantly more expensive in the current interest rate environment.
81 companies in the S&P 500 (16% of the index) in their quarterly earnings conference calls discussed difficult negotiations with unions and had to deal with strikes, an increase of 80% year-on-year and a factor of three compared to 2021, as well as a new 20-year high. This suggests that bargaining power has shifted from "Wall Street" to "Main Street" in an environment of full employment, which could indicate higher margin pressure from labour costs in the future.
Two thirds of all companies that published an outlook were negative, which is well above the five-year average and just above the ten-year average. Sales growth of 3.3% and profit growth of 3.2% year-on-year are now expected for the fourth quarter. If this is achieved, sales for the full-year 2023 would grow by 2.3% and earnings per share by just under 0.6%. For the full-year 2024, the current consensus estimates assume sales growth of 5.5% and earnings growth of 11.6%.
It should be noted at the outset that the available data and prepared analyses for the European market is still lagging behind those for the US. Nevertheless, clear key insights can be gained after more than 80% of the companies in the Stoxx Europe 600 have reported their Q3 earnings. In contrast to the US, Europe slipped into an earnings recession with a clear time lag of around two quarters. This became even more pronounced in the third quarter of 2024. Earnings per share slumped by an estimated 16% compared to the same quarter of the previous year, after a drop of 7% had been anticipated at the start of the reporting season. There were clear distortions due to the results of individual sectors. The strongest sector, for example, was the financial sector (mainly banks), while the weakest sector was energy. Excluding the energy sector, earnings growth in Q3 in Europe was just positive; excluding the financial sector, earnings growth was minus 30%.
More relevant than the earnings momentum appears to be the disappointing sales momentum. Well under 40% of companies were able to surprise positively in terms of turnover, which compares with a historical average of 52% and is close to a record low. The number of mentions of weaker demand in the conference calls rose significantly, while the ratio of mentions of "stronger" relative to "weaker" even fell to a 16-year low. As a result of these developments, expectations for the fourth quarter of 2023 have been lowered by 3% in terms of sales growth and 2% in terms of profit growth. For the full-year 2024, the consensus currently assumes earnings growth in the magnitude of 7%.
The reporting season for the third quarter can be considered disappointing overall. In both the US and Europe, with weak sales momentum as one of the main reasons. It is also reflected in the distortions in how investors reacted to positive or negative surprises. There was little tolerance for misses, with the result that negative surprises led to much sharper price declines than positive ones were rewarded with price gains. In the US, after three quarters of negative earnings growth, an even slightly positive earnings momentum in Q3 has raised hopes that the worst of the earnings recession is over. Europe, however, is lagging this trend. In view of current developments, expectations for the full-year 2024 are likely to show scope for further reductions in both markets.