Today in the podcast, we run through our takeaways from 1Q23 reporting season. Two big things you need to know: First, recovery remains a key theme permeating the S&P 500 earnings stats we’ve been tracking, helping explain the resiliency of the S&P 500 of late. Second, the tone in S&P 500 earnings calls has generally been balanced in terms of the discussion of recent trends, the state of the consumer, outlooks, and inflation/pricing, while commentary on China has been mixed.

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Now, the details.

Takeaway #1:

Recovery Remains A Key Theme Permeating The S&P 500 Earnings Stats We’ve Been Tracking, Helping Explain The Resiliency Of The S&P 500

With the vast majority of S&P 500 results now in (84%, through Thursday’s close, when we froze most of our stats), we’ve updated the key stats that we’ve been tracking on 1Q23 reporting season. If there’s one overarching theme that we’re seeing in the data, it’s that a healing process is underway in many sectors. We think that helps explain why the stock market broadly speaking has been so resilient recently. More specifically, here’s what jumps out so far:

• The pace of beats is up for the S&P 500 on both EPS and revenues vs. the prior quarter.

• Typically, in years that see bottom-up EPS forecasts fall, cuts are done by mid-year.

• Furthermore, Earnings sentiment – the rate of upward EPS estimate revisions on FY1 and FY2 – is improving (turning positive or getting less negative) for 8 out of 11 GICS sectors in the S&P 500. We’re seeing this in all of the Growth sectors like Tech, Comm Svcs and Consumer Discretionary;

• As well as all of the defensives ex Utilities,

• and value-oriented cyclicals - Materials and Industrials - that were most exposed to supply chain pressures.

• These sectors are all seeing trends improve – getting less negative on the rate of upward revisions or seeing positive revisions return.

• Energy and Financials - which saw upward revisions last year as inflation and interest rates ramped - are the two main exceptions where earnings revisions were positive last year but are in a downtrend this year.

Moving on to takeaway #2.

The Tone In S&P 500 Earnings Calls Has Generally Been Balanced

Our team continued to read through S&P 500 earnings call transcripts last week, focusing on companies in the Communication Services, Consumer Discretionary, Technology, Industrials, and Materials sectors. The themes that we’ve been highlighting over the past few weeks generally remain intact. Here are some of the things that jumped out from last week:

• First, we continue to see balance in the discussion of recent trends between companies highlighting softness and those referencing strength and resiliency.

• Both camps referenced the uncertain macro backdrop. A few companies highlighting weakness in March also referenced improvement or stabilization in April.

• Second, with more consumer companies reporting last week, it’s worth noting that we saw a similar balance between companies highlighting consumer health and resiliency vs. shifting consumer patterns and price sensitivity.

• The idea that demand for travel and experiences remains strong was apparent in the comments of the travel-related companies, while goods-focused companies were more likely to highlight channel shifting.

• As has been the case throughout reporting season, we saw several companies emphasized weakness among lower-end consumers.

• Additionally, in their outlook discussions, we continued to see some companies emphasize strength and recovery…

• Admittedly, others offered a more cautious view. These divisions on recent trends, the consumer, and outlooks have been seen consistently throughout reporting season.

• Meanwhile, comments on inflation and pricing came across as mixed last week as well,

• while supply chains and labor continued to be described as having improved significantly.

• On the regional banking crisis, the companies that spoke about it continued to emphasize limited direct impacts. That’s also been a consistent theme since March.

• With fewer Financials in the spotlight, the tone around cash deployment seemed much better than what we observed in the early weeks when we saw more companies talking about scaling back on dividends and buybacks. That trend was less apparent last week.

• Importantly, the messaging on China remained mixed, as has generally been the case over the past few weeks. Some companies have highlighted strength and optimism around the China recovery…

• while others have highlighted disappointing trends or only a modest recovery. We see the mixed messaging on China as a positive development for the US equity market, as it challenges the consensus bull view on China which caused some rotation in flows to start the year.

That’s all for now. Thanks for listening. And if you haven’t already, be sure to subscribe to the audio only version of this podcast on Apple and Spotify, or wherever you get your podcasts.