So how much does the year-end stock market rally depend on the Federal Reserve and the anticipation of interest rate cuts in 2023?
A huge amount. Perhaps a frightening large amount.
Given the very slim year-over-year growth in earnings and revenue likely for 2023 when all the numbers are in for the end of the year in early January.
At the least, these numbers point to a rocky fourth quarter earnings season in January.
FactSet calculates that Wall Street analysts expect the S&P 500 to report earnings growth of 0.6% in calendar 2023. That’s way below the trailing 10-year average (annual) earnings growth rate of 8.4% for 2021 through 2022. So far on a quarterly basis, 2023 has shaped up this way: earnings declines of 1.7% and 4.1% for the S&P 500 in the first nd second quarters of 2023, respectively. And earnings growth of 4.9% for the third quarter. FactSet calculates that analysts expect the stocks in the index to report an earnings growth of 2.4% for Q4 2023.
Eight sectors are predicted to report year-over-year growth in earnings in 2023, FactSet calculates, led by the Consumer Discretionary and Communication Services sectors. Three sectors are projected to report a year-over-year decline in earnings: Energy, Materials, and Health Care.
The Consumer Discretionary sector is expected to report the highest year-over-year earnings growth rate of all eleven S&P 500 sectors at 43.9%. However, three industries in the sector are expected to report a more than 10% drop in earnings: Leisure Products (-36%), Automobiles (-12%), and Household Durables (-11%).
The Broadline Retail and Hotels, Restaurants, & Leisure industries are the largest contributors to earnings growth for the sector. If these two industries were excluded, the Consumer Discretionary sector would be reporting a year-over-year decline in earnings of -7.1% instead of year-over-year earnings growth if 43.9%.
Amazon.com is the largest contributor to earnings growth for the sector. If this company were excluded, the estimated earnings growth rate for the Consumer Discretionary sector would fall to 16.2% from 43.9%.
The Communication Services sector is expected to report the second-largest year over year earnings growth rate of all eleven S&P 500 sectors at 23.4%. At the company level, Meta Platforms and Warner Brothers Discovery are the largest contributors to earnings growth for the sector. If these two companies were excluded, the estimated earnings growth rate for Communication Services sector would fall to 11.3% from 23.4%.
The Energy sector is expected to report the largest year-over-year earnings decline of all eleven sectors at -29.0%. Not surprising: The average price of oil in 2023 is 18% below the average price for oil in 2022.
The Materials sector is expected to report the second-largest year-over-year earnings decline of all eleven sectors at -23.2%. Three of the four industries in this sector are predicted to report a year-over-year decline in earnings of more than 20%: Metals & Mining (-34%), Containers & Packaging (-24%), and Chemicals (-21%). The Construction Materials industry is the only industry in the sector that is projected to report year-over-year earnings growth with a 44% year-over-year increase.
The Health Care sector is expected to report the third-largest year-over-year earnings decline of all eleven sectors at -21.1%. Three industries are projected to report a double-digit decline: Pharmaceuticals (-43%), Biotechnology (-28%), and Life Sciences, Tools, & Services (-10%) industries.
There look to be two reasons for the anemic earnings growth rate in 2023.
First, revenue growth will be a very low 2.3%, if fourth quarter estimates play out. That’s below the trailing 10-year average annual revenue growth rate of 5.5% for 2013 through 2022.
Second, a slight drop in net profit margin for 2023 to 11.6% from 11.8% in 2022. That is still slightly above the the 10-year average annual net profit margin of 10.6%.
