Companies’ earnings beating analyst expectations despite a difficult 2022

Most of the European companies that reported their earnings so far have been offering positive surprises to investors. But analysts expect to see decreasing revenues and earnings for the next quarters of 2023. US companies are showing decreasing positive surprises, supporting the narrative of a 2023 with lower earnings but increased companies valuations. 

Market commentary by eToro analyst for Romania, Bogdan Maioreanu

The beginning of the year’s rally seems to have come to a halt with the markets on both sides of the Atlantic fearing that inflation is here to stay for longer than anticipated. The investors’ euphoria calmed after the realization that the Fed might see another two or even three interest rate hikes. S&P 500 lost almost half of the gains from the beginning of the year. The European Central Bank is also forecasting further rate increases, the President Christine Lagarde having all reasons to believe another 0.5% increase in March. The European stocks markets are also attentive to the inflation narrative but the losses are minimal so far.  So far the earnings season is bringing positive surprises after 2022 that brought one crisis after another.

All this news might bring back to the investors spotlight the high yield dividend stocks. These are defensive to inflation and uncertainty. 2022 saw strong 9% dividend growth and record 1 trillion dollars of US share buybacks. 2023 is to be more muted as profit pressures rise, but still positive. Dividends and buyback of shares are the two topics that most Romanian investors voted on in the General Assembly of companies last year, reveals the eToro Retail Investor Beat survey.

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Inflation concerns dampen investor enthusiasm despite strong Q1 earnings

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In Europe Q4 earnings are expected to increase 13.6% from the same quarter of last year. Excluding the Energy sector, earnings are expected to increase 7.9% according to the latest Refinitiv I/B/E/S data. 176 companies in the European STOXX 600 have reported earnings with over 60% having results exceeding analyst estimates more than the usual 53%. This is the result of a diminished guidance trend that started last year, companies decreasing targets because of the risks induced in the markets by the inflation, the increasing interest rates and the geo-political situation triggered by the Ukraine war. The Energy sector has the highest revenue growth rate for the quarter (25.5%), while the Utilities has the weakest anticipated growth (-62.2%) compared to Q4 2021.

Over the Atlantic, over 81% of the S&P 500 companies reported, with 67.5% showing earnings above analyst expectations, below the prior four-quarter average of 75.5%. The Q4 2022 earnings beat rate is the lowest since 2015 Q4 found Refinitiv. Information Technology had the highest earnings beat rate this quarter (82%) followed by Health Care (81%), Consumer Discretionary (69%). 62% of the companies in the Financial industry offered positive surprises. Meanwhile, Communication Services (42.1%), Utilities (47.4%) and Real Estate (54.5%) had the lowest earnings beat rate.

Over 76% of the Romanian investors had in their portfolios at the end of 2022 shares from the financial sector and 72% from the technology sector, according to the eToro Retail Investor Beat Survey. Despite the spectacular profits realized in 2022, only 55% of the investors are having energy companies stocks in their portfolios, while about 50% of the investors were having utilities in their portfolios, a sector that underperformed in terms of both revenues and earnings.