The Earnings Recession Is Over

The year-long earnings recession ended in the third quarter, but analysts are increasingly concerned about Q4.

(Image credit: Getty Images)

The earnings recession that started a year ago looks to be over.

With more than 98% of S&P 500 companies having reported quarterly results, it's fair to say the numbers are in and they're good. The S&P 500 is set to post year-over-year earnings growth for the first time since the third quarter of 2022.

Indeed, the S&P 500's Q3 earnings growth state stands at 4.8%, according to FactSet. That's remarkable considering that as of September 30, analysts forecast the S&P 500 to post a 0.3% decline in year-over-year third-quarter earnings. 

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And make no mistake: this was a better-than-expected earnings season that delivered on a number of fronts.

Drilling down, 82% of S&P 500 companies exceeded analysts' average earnings per share (EPS) estimate vs a five-year average of 77% and a 10-year average of 74%. Looked at another way, the S&P 500's EPS beat rate hasn't been this high in two years. 

Moreover, companies beat Wall Street EPS estimates by an average of 7.2%. Although that's below the five-year average of 8.5%, it easily tops the 10-year mean of 6.6%.

"Positive earnings surprises reported by companies in the information technology, financials and consumer discretionary sectors, partially offset by downward revisions to EPS estimates and negative earnings surprises reported by companies in the healthcare sector, have been the largest contributors to the increase in the earnings for the index," writes John Butters, senior earnings analyst at FactSet. 

The consumer discretionary sector more than pulled its upside-surprise weight during Q3 earnings season, with Airbnb (ABNB), (AMZN) and Nike (NKE), a highly rated Dow Jones stock, delivering some of the biggest EPS beats.

In the tech sector, Nvidia (NVDA) – NVDA stock has tripled this yearIntel (INTC) and Intuit (INTU) all exceeded Street EPS forecasts by wide margins. The communications services sector was boosted by better-than-expected earnings from Meta Platforms (META) and Paramount Global (PARA), among other names.

Street slashing Q4 earnings estimates

The Street was too downbeat coming into Q3 and it's not much more optimistic about Q4. Concerns about a possible economic slowdown or recession have analysts lowering their Q4 EPS estimates by more than usual, per FactSet.

"During the months of October and November, analysts lowered EPS estimates for the fourth quarter by a larger margin than average," Butters notes. "The Q4 bottom-up EPS estimate decreased by 5% from September 30 to November 30."

For context, the average decline in the bottom-up EPS estimate during the first two months of a quarter is 2.9% over the past five years, and 2.7% over the past decade.

It's important to note analysts are taking cues from the companies they follow – and there's increasing pessimism to be found in the C-suite, too. The percentage of companies issuing negative earnings guidance for the fourth quarter stands comfortably above both its five- and 10-year averages. 

Of course, there's nothing wrong with talking down expectations. The more the Street lowers its expectations, the easier it is for companies to beat them.

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Dan Burrows
Senior Investing Writer,

Dan Burrows is Kiplinger's senior investing writer, having joined the august publication full time in 2016.

A long-time financial journalist, Dan is a veteran of SmartMoney, MarketWatch, CBS MoneyWatch, InvestorPlace and DailyFinance. He has written for The Wall Street Journal, Bloomberg, Consumer Reports, Senior Executive and Boston magazine, and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among other publications. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange and hosted a weekly video segment on equities.

Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.

In his current role at Kiplinger, Dan writes about equities, fixed income, currencies, commodities, funds, macroeconomics, demographics, real estate, cost of living indexes and more.

Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.

Disclosure: Dan does not trade stocks or other securities. Rather, he dollar-cost averages into cheap funds and index funds and holds them forever in tax-advantaged accounts.