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Earnings Season Insights: Q2 Bottomed Out, Promising Outlook for the Rest of the Year

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Quarterly Earnings Outlook: Second Half Looks Strong

The Bottom Line for Second Quarter Earnings

In the second quarter of this year, earnings are expected to decline 6.8% from the previous year, marking the trough for this earnings cycle. However, the rest of 2023 and 2024 are projected to show notable improvement. S&P 500 estimates for the second quarter are as follows: Q1 - $53.08, Q2 - $52.25, Q3 - $55.46, Q4 - $57.37, Q1 24 - $57.36, Q2 24 - $59.72. Consumer discretionary, communication services, and industrials are anticipated to experience earnings growth this quarter, while technology is expected to remain flat. On the other hand, declines are projected for energy, materials, and health care, due in part to a significant charge from Merck.

Better Than Expected Results

Despite skeptics suggesting that earnings would need to surpass historical expectations in order to make a significant impact on stock market performance, results for the second quarter have been slightly better than anticipated. Around 80% of companies are beating earnings estimates, exceeding the long-term surprise rate. However, revenues have not fared as well, with only 64% of companies surpassing revenue estimates. A contributing factor to this discrepancy may be pricing power and its limited duration, according to Tajinder Dhillon, a Senior Research Analyst at Refinitiv.

The Importance of Forward Profit Estimates

When it comes to stock prices, the focus should be on how estimates for future earnings are changing, as the stock market is a discounting mechanism for future dividends and earnings. The overall trend for the S&P 500 this year has seen estimates starting higher, then gradually decreasing during the first half of the year. However, the good news is that these estimates have now stabilized. This change in trend signifies that earnings are no longer on a downward trajectory.

Continued Opportunities in Tech

The AI revolution was a significant story in the first half of 2022, with a small number of stocks driving up the S&P 500. Some experts believe this trend is beginning to play out, but others, like Dan Ives from Wedbush, remain optimistic about the AI story. Ives asserts that the benefits of AI will expand to include more companies and sees tech leading the market higher in the second half of the year and into 2024.

The Story of "Disinflation"

Several reports have highlighted lower volumes from companies such as Dow, MMM, and Kimberly-Clark, which has led to pricing challenges and margin pressures for certain businesses like Whirlpool and Dow. This has prompted some companies to consider cost-cutting measures. However, these issues are expected to become more prevalent later in the quarter and the year, positioning them as a developing story for the future.

Conclusion: A Promising Outlook for New Businesses

The quarterly earnings outlook paints a positive picture for new businesses looking to establish themselves in the market. While the second quarter may have seen a decline in earnings, the projection for the second half of 2023 and 2024 shows a significant improvement. This suggests that the overall economic landscape is recovering and growing. Despite initial skepticism, the second quarter has yielded better-than-expected results, with the majority of companies exceeding earnings estimates. This indicates a potential for businesses to outperform expectations and make a strong impact on stock market performance. However, it is important to note that revenues have not fared as well, highlighting the need for companies to focus on improving their pricing power and finding strategies to maximize their revenue potential. Looking ahead, the stabilization of forward profit estimates indicates that earnings are no longer on a downward trajectory. This is a positive signal for new businesses, as it suggests a more stable and favorable market environment. Moreover, experts remain optimistic about the opportunities in the technology sector, particularly in the field of artificial intelligence, which is expected to lead market growth in the second half of the year and beyond. It's worth noting that certain challenges, such as pricing pressures and margin constraints, may arise due to lower volumes. However, these issues are expected to become more prevalent later in the quarter and the year, offering new businesses an opportunity to find innovative solutions and differentiate themselves in the market. In conclusion, despite some initial setbacks, the quarterly earnings outlook and market trends present a promising landscape for new businesses. By capitalizing on the projected growth and identifying areas of opportunity, entrepreneurs have a favorable environment to establish and grow their ventures. Article First Published at: https://www.cnbc.com/2023/07/28/lessons-from-earnings-season-2q-was-the-bottom-and-the-rest-of-year-is-looking-strong.html

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