- The S&P 500 is anticipated to suffer its first year-over-year earnings decline since Q3 2020
- I believe stocks in the Energy and Industrials sectors are set to stand out in the current environment
- In contrast, shares in Materials, Consumer Discretionary, and Communication Services groups are poised to struggle the most
Wall Street’s Q4 earnings season kicks off at the end of this week, with notable names like JPMorgan Chase (NYSE:), Bank of America (NYSE:), Citigroup (NYSE:), Wells Fargo (NYSE:), UnitedHealth (NYSE:), and Delta Air Lines (NYSE:) all set to report their latest financial results.
Investors are bracing for what may be the worst reporting season in more than two years amid a toxic combination of several macroeconomic headwinds, including rising interest rates, persistently high inflation, slowing economic growth, as well as ongoing supply chain disruptions, and labor shortages.
Analysts anticipate Q4 earnings will fall by -4.1% when compared to the same period last year, according to FactSet data. If confirmed, that would mark the first year-over-year decline since the third quarter of 2020, when the economy was reeling from the effects of COVID lockdowns.
Likewise, revenue expectations are also worrying, with sales growth expected to rise +3.8% from the same quarter a year earlier. If that is in fact the reality, FactSet pointed out that it would mark the lowest annualized revenue growth reported by the index since Q4 2020.
Q4 Sector Estimates: Biggest Winners & Losers
According to FactSet, the Energy sector is expected to report the largest YoY gain in earnings of all eleven sectors, with a +62.7% surge in Q4 EPS. With higher oil and prices benefitting the sector – the average price of in Q4 2022 was $82.64 per barrel, roughly 7% above the average price in the same quarter a year earlier – it is also projected to record the highest year-over-year (YoY) increase in revenue at +11.5%.
The Industrials sector is expected to report the second highest YoY gain in earnings of all eleven sectors, with a notable +38.5% increase in Q4 EPS, led by the Airlines and Aerospace & Defense groups. The industry is also expected to report the second biggest jump in YoY revenue growth, with Q4 sales set to rise +9.1%.
In contrast, the Materials sector – which includes companies in the metals and mining, chemicals, construction materials, and containers and packaging industry – is projected to report the worst YoY earnings slump of all eleven sectors, with EPS set to tumble -26.3% from a year earlier, per FactSet. With lower prices of metals – such as , , , , , and – weighing on the sector, it is also expected to report the second largest YoY decline in revenue, with sales forecast to fall -3.7%.
Meanwhile, with an anticipated decline of -20.3% in Q4 EPS, the Consumer Discretionary sector – which is perhaps the most sensitive to economic conditions and consumer spending – is projected to suffer the second worst YoY earnings drop as shoppers reduce purchases of discretionary items and divert more spending into basic needs.
Another group to watch will be the Communication Services sector – which includes telecom companies as well as media, entertainment, and online media services providers – is forecast to report the third largest YoY earnings slump, with EPS for the group set to decrease -19.0% from a year earlier, per FactSet.
Elsewhere, the Utilities sector – which usually tends to outperform in low interest rate environments – is expected to report the biggest YoY sales decline of all eleven sectors, at -18.5%, as the group faces a difficult operating environment due to the Federal Reserve’s aggressive .
Q4 Stocks Biggest Upward EPS Estimate Revisions
At the company level, Marathon Petroleum (NYSE:) (up 349.5% to $5.84 from $1.30), Valero Energy (NYSE:) (up 175.7% to $6.81 from $2.47), and Hess (NYSE:) (up 112.9% to $1.81 from $0.85) are expected to be the largest contributors to the YoY spike in earnings for the Energy sector.
Two other notable names in the group that are set to enjoy significant improvements in their Q4 financial results are ExxonMobil (NYSE:), which is projected to post EPS of $3.29, up 60.5% from a profit of $2.05 in the year-ago period, and Chevron (NYSE:), which is anticipated to record a 73.4% YoY increase in EPS to $4.44/share.
In the Industrials sector, Delta Air Lines (NYSE:), United Airlines (NASDAQ:), and Southwest Airlines (NYSE:) are a few to watch amid the ongoing rebound in air travel. My preferred pick is Delta, which is forecast to post Q4 EPS of $1.32, soaring 500% from last year.
In addition to the airlines, Raytheon (NYSE:) Technologies (NYSE:), Northrop Grumman (NYSE:), and Boeing (NYSE:) are some of the other notable names in the Industrials group enjoying robust upward revisions to their Q4 EPS estimates as the geopolitical conflict between Russia and Ukraine drags on.
Stocks With Largest Cuts to Q4 EPS Estimates
On the downside, Amazon (NASDAQ:) (from $0.38 to $0.20) and Target (NYSE:) (from $3.33 to $1.39) are among several stocks in the Consumer Discretionary sector which are expected to post disappointing results due to their heavy reliance on the strength of the U.S. consumer.
MGM Resorts (NYSE:) (from $0.17 to -$1.47), Wynn Resorts (NASDAQ:) (from -$0.38 to -$1.19), Las Vegas Sands (NYSE:) (from -$0.03 to -$0.09), and Royal Caribbean (NYSE:) (from -$0.68 to -$1.30) are a few more names I think you should stay away from as they prepare to report their Q4 earnings.
Meanwhile, Google-parent Alphabet (NASDAQ:) (from $1.41 to $1.19), Meta Platforms (NASDAQ:) (from $2.67 to $2.26), and Walt Disney (NYSE:)(from $1.29 to $0.80) are the largest contributors to the decrease in expected earnings for the Communication Services sector in Q4.
In addition, Netflix (NASDAQ:), Warner Bros. Discovery (NASDAQ:), and Paramount (NASDAQ:) have also seen their estimates slashed sharply amid the current economic environment.
In the Information Technology sector – which is perhaps the most vulnerable to rising interest rates and elevated inflation – Apple (NASDAQ:), Microsoft (NASDAQ:), and Qualcomm (NASDAQ:) are the most significant contributors to the decline in expected earnings for this sector.
Intel (NASDAQ:), and Seagate Technology (NASDAQ:), which are anticipated to report YoY profit declines of 80.7% and 94.6%, respectively, are two more names getting their EPS estimates cut lately.
Elsewhere, LyondellBasell Industries (NYSE:) (from $2.77 to $1.21), Corteva (NYSE:) (from $0.15 to $0.07), Celanese (NYSE:) (from $3.31 to $1.66), and Dow Inc (NYSE:) (from $1.08 to $0.57) have been the biggest contributors to the expected decrease in Q4 earnings for the Materials sector amid the uncertain global outlook.
It’s All About Guidance
Beyond the top-and-bottom-line numbers, I will pay close attention to announcements on forward guidance for the months ahead, given the uncertain macroeconomic outlook, which has seen recession fears mount lately.
The ongoing strength of the will also be of major importance as it creates significant headwinds for companies with international revenue exposure, mainly those in the Information Technology, Materials, and Communication Services sectors.
Other key issues likely to come up will be the health of the U.S. consumer, future hiring and firing plans, as well as lingering supply chain worries.
Considering the multitude of worries mentioned above, I expect to see a higher percentage of companies lower their outlook for earnings and sales growth for Q1 2023 — and possibly even withdraw forward guidance altogether.
Disclosure: At the time of writing, I am short on the S&P 500 and Nasdaq 100 via the ProShares Short S&P 500 ETF (SH) and ProShares Short QQQ ETF (PSQ).
The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.
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