The TSX may be doing better than the S&P 500 so far this year, with the Canadian index down 11.5% and the S&P 500 in bear market territory, but earnings season is showing a big divergent between the two.
What Are Third Quarter Earnings Telling Us?
According to the most recent data, the S&P 500 is expected to report third quarter year-over-year earnings growth of 2.4%. That might sound solid, but that would represent the lowest earnings growth by the index since the third quarter of 2020.
That number may not hold though, given the number of companies that reported first and second quarter earnings above estimates. Instead, analysts expect S&P 500 companies to report earnings growth of between six percent and seven percent.
Chances are good that the S&P 500 will report stronger than expected results. The actual earnings rate has exceeded the estimated earnings growth rate at the end of the quarter in 39 out of the last 40 quarters. The only quarter where that didn’t happen was in the first quarter of 2020.
While the U.S. economy is expected to tip into a recession in 2023, the strong U.S. dollar makes for cheaper imports for American consumers. And despite a weakening economy, U.S. manufacturing data remains robust. In fact, manufacturing is experiencing the strongest jobs recovery since the 1950s.
It’s a different story in Canada. Analysts have actually lowered their earnings estimates more than average for companies in the S&P/TSX Composite index. On a per share basis, estimated earnings for the third quarter are down by six percent from June 30 to September 30.
That’s larger than the five-year average decline (-0.9%), 10-year average (-3.1%), 15-year average (-4.5%), and the 20-year average (-3.6%) for a quarter.
The third quarter also marked the first decline in the quarterly earnings per share estimate since Q2 2020 (-36.7%). This isn’t a total surprise; that was the depths of the pandemic.
While the downward revisions sounds dire, it doesn’t mean earnings on the S&P/TSX Composite will be horrible. The Index is still expected to report year-over-year earnings growth of 14.8%. That’s pretty solid, but those projections are significantly lower when compared to the estimated year-over-year earnings growth rate of 20.4% on September 30, and the forecasted year-over-year earnings growth rate of 31.6% on June 30.
What it does show, though, is that the economy is slowing down. And, since our economy is tethered to the U.S., the chances of falling into a recession in 2023 is a virtual given.
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