Earnings Watch: Q3 earnings kicks off with a warning from Shell Earnings Watch: Q3 earnings kicks off with a warning from Shell Earnings Watch: Q3 earnings kicks off with a warning from Shell

Earnings Watch: Q3 earnings kicks off with a warning from Shell

Equities 10 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  We have long argued that Q3 earnings will disappoint due to margin compression and the energy sector not delivered the same contribution in Q3 as it did in Q2 lifting aggregate earnings. The warning from Shell's CEO and the bad outlook from AMD and Samsung over the past 24 hours are evidence that the Q3 earnings season is most likely going to disappoint. In today's earnings preview we highlight next week's earnings and we also provide our view on the current S&P 500 earnings estimates for next year which we believe are unrealistic given the current macro backdrop.


Negative surprises will pop up everywhere during earnings season

We have been arguing for quite some time that the Q3 earnings season will surprise to the downside. The recent string of worse than expected results from Nike and H&M, and now also AMD disappointing last night and Samsung this morning missing estimates on Q3 operating income by 12%, are clear signs of what awaits investors. The energy and mining sectors were among the strong contributors in Q2 holding up the aggregate earnings figures, but Shell’s CEO said yesterday that Q3 earnings will be lower q/q due to lower profitability in its refining and chemicals businesses.

The list below shows all the most important earnings releases next week. Consumer oriented companies such as PepsiCo, Walgreens Boots, and Delta Air Lines are important earnings to watch for updating our information picture on the consumer amid the cost-of-living crisis. On Friday, several large US financial institutions will report earnings with our focus on JPMorgan Chase, Citigroup, and Wells Fargo. The key things to watch for in US bank results are their ability to increase their net interest margin and the credit provisions.

  • Wednesday: PepsiCo
  • Thursday: Progressive, Fast Retailing, Tryg, Walgreens Boots Alliance, Fastanal, BlackRock, Delta Air Lines, Domino’s Pizza
  • Friday: Shanghai Putailai New Energy, YTO Express Group, PNC Financial Services, JPMorgan Chase, Morgan Stanley, Citigroup, UnitedHealth Group, Wells Fargo, US Bancorp, First Republic Bank

Analysts are too optimistic

In our view the bad Q3 earnings season will be a function of both weakening numbers from companies but also unrealistic expectations. The chart below shows the realized quarterly earnings per share for S&P 500 and here we already observe that realized Q3 earnings are behind estimates and that estimates are suggesting strong earnings growth into Q4. This seems very unrealistic to us given the wage pressures that CEOs are complaining about and highlighting as the biggest short-term risk to profitability.

The EPS estimates for S&P 500 are $224.98 in 2022 and $243.22 suggesting companies can grow earnings close to trend growth and even expand profit margins to record highs in 2023. We find it very hard to reconcile with the current macro backdrop of tighter financial conditions, war in Ukraine, an energy crisis, and China’s growth slowing down. The high inflation will help revenue growth in nominal terms but it will increase wage demands to offset decline in purchasing power and thus we believe the most realistic dynamic from here is lower profit margin. We expect the net profit margin to decline to 11.3% from 12.6% in 2021 and if apply the estimates on revenue for 20233 of $1801 then our EPS estimate for 2023 is $203.51 which is 16% lower than the current consensus estimate. This translate into a 2023 P/E ratio of 18.4 or earnings yield of 5.4% which one could argue is not an adequate risk premium of US government bond yields and investment grade bonds.

One could also argue that the revenue estimate for 2023 is a bit too optimistic as it implies a 4.1% growth rate which might be difficult, but now we are going with this estimate. Dividend futures for 2023 are currently priced at $64.80 which is actually a decline from the expected 2022 dividends of $65.52. A slowdown in dividends is more consistent we our estimate for earnings in 2023 and would take the payout ratio back to 31.9% which again would be closer to the recent average. 
S&P 500 Dividend futures Dec23 | Source: Bloomberg

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.