Using the Q3 earnings report season as a guide, the Q4 season will be the worst since the pandemic began. At face value, the S&P 500 (NYSEARCA: SPY) It managed to post revenue growth in Q3, but internals were sluggish, very sluggish. At just 2.5%, the pace of growth in Q3 was the slowest since the pandemic began (and even before), but it was weaker than analysts had expected. Expected early in the quarter.
As of September 30, 2022, the consensus for the S&P 500 was 2.9%, which means the index’s earnings growth rate has declined by 40 basis points by the end of the reporting period, showing a gain trend. Even before the pandemic, it was the first quarter in years that the S&P 500 did not beat its expectations, and this phenomenon has the potential to become a trend.
Q4 will see S&P 500 earnings contract
The consensus outlook for the Q4 period is close to -2.5% for the S&P 500, and it’s low. This figure is down from the 10.10% growth expected in the middle of the year and will be the final figure. Worse than currently predicted. On a sector-by-sector basis, only 4 sectors are expected to witness revenue growth, and only significantly so Department of Energy ((NYSEARCA: XLE).
The remaining 3 growth sectors will see no better than 38% growth (industrials and this is due to the post-pandemic rebound) and consensus earnings figures for 10 sectors other than energy have fallen.
Q4 is the most important sector for the holiday shopping season Consumer Discretionary Sector (NYSEARCA: XLY). The consumer discretionary sector isn’t just looking for a 2nd place Poor earnings summary Expectations for declines across all 11 S&P 500 sectors have more than doubled over the past 2 months, from about -7.0% to worse than -18%.
Assuming this trend continues and there is no reason to expect it to change, the preferred sector could easily see its earnings shrink by more than 20% by the end of the season.
The biggest risk to the market is downward revisions to the 2023 outlook
Now the market expects revenue growth to resume in 2023, but there is a much bigger risk to that outlook. Until now, analysts have been reluctant to cut their outlook even for the next quarter, which can be seen in the data. The outlook for Q4 didn’t start to explode until the Q3 reporting cycle began, and we can expect this to happen again in Q4.
As the Q4 reporting period rolls around, analysts will begin to revise their outlook for Q1 2023 and, possibly, extend into 2023. The S&P 500 will continue its downward slide. .
On a sector basis, the Consumer Discretionary sector is expected to be the big winner in 2023, being the risk hub. XLY’s top 2 holdings Amazon (Nasdaq: AMZN) And Tesla (NASDAQ: TSLA), both of which are more expressive of the impact of higher interest rates on consumers. The FOMC is expected to reduce the pace but not the duration of its interest rate hikes. If anything, the group will likely raise rates above 5.0% by the middle of next year, cutting deeply into Tesla and Amazon sales.
Technical Outlook: S&P 500 Bear Market Not Over
The S&P 500 hit a bottom in early October and may have entered a trading range but the decline is not over by a long shot. Although the original down channel was broken, at this time, the downtrend may have been shifted forward rather than completed. As it is, the S&P 500 index is below key resistance at the 4,160 level and looks like it has peaked.
The next downside in the market may begin before Q4 reporting begins due to inflation and the FOMC. An outlook on earnings is what drives the index, and that’s it Inflation and the FOMC They drive the revenue outlook.
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