03 Mar 2023 3 min read

Earnings season was OK. This time…

By Camilla Ayling

Company sales grew yet earnings shrank year-on-year, but both beat low expectations. How long can the apparent resilience last?

Earnings season


It has been another busy earnings season spent digesting companies’ Q4 results. Europe has further to go, but only 5% of companies in the S&P 500 were left to report this week. Now that releases are winding down, we can reflect on the results as a whole, what we have learnt, and any insights we can take forward.

LGIM’s forecast was for a Q4 reporting season in line with expectations (see Lars Kreckel’s blog here) given estimates had been already cut prior to reporting season. Also, as Lars wrote, earnings declines “will only begin once the actual recession begins, not in anticipation”.

In fact, when you look at how Q4 estimates have trended over time, from October 2022 into this reporting season, earnings per share (EPS) have fallen 7%, around twice the typical 4% cut[1].


Inflection point nears

On a sector basis, energy was the standout performer due to Russia’s invasion of Ukraine and the resulting rocketing of energy prices. It was the only sector which saw upward revisions to EPS estimates over the last quarter, and essentially made up the entire earnings growth of 2022. Yet that tailwind is now reversing through lower oil prices; analysts believe the sector will be the greatest drag on market earnings across 2023.

Across the S&P 500, companies have beaten analyst estimates for EPS and sales this earnings season, but the percentage of companies doing so is below historical median levels. For example, the average EPS beat historically is 4%[2], whereas this time around EPS only beat by 2%[3], despite the heavy cuts to consensus prior to earnings season. Even though these results do not indicate a recession yet, they are hinting that a downturn is to come.

Accordingly, corporate sentiment, as gauged by the positive or negative language used in company earnings calls, is deteriorating. [2]. Historically, when this has occurred, the next quarter’s company earnings have tended to move lower, so this strong correlation suggests that further earnings declines are on the horizon.


The story is in the margin

Margin compression has been the main driver of earnings pressure this season. Company profitability has been squeezed, given cost growth has outpaced sales growth. Labour is one of the variable costs that companies can cut to protect margins, and they can do so relatively quickly.

This earnings season, layoff announcements among the big technology companies have grabbed headlines, but as the results season progressed this theme broadened out to other sectors. Even though companies such as Microsoft*, Google (Alphabet*) and Amazon* are making staff redundant, it’s important to remember that ‘big tech’ companies like these grew their headcounts substantially post-COVID, so this can be seen as merely resetting some of that rapid employee growth.

Margins will remain a key indicator to watch over the next few reporting seasons. On the one hand, we are witnessing a sequential moderation in inflationary pressures in the most recent data, which is helping costs such as freight, energy and raw materials rebase lower. However, labour markets remain tight by historic standards, and this suggests wage growth will remain a key headwind to company margins.


Are we in the clear?

Despite the sizeable revisions to 2023 EPS forecasts we’ve already seen, further downside is expected to this year’s EPS consensus. The consumer discretionary sector is currently forecast to accelerate in 2023 and lead earnings growth. Yet one would expect this sector to be relatively more exposed if we head into a consumer downturn from both a top-line and bottom-line perspective.

Overall, Q4 earnings season has demonstrated underlying resilience so far in the economy. Yet it appears company sentiment is souring, and guidance has been weaker than expectations. However, this has not been the ‘correction’ event we are expecting from company earnings at some point.

So, overall, we can say, ‘It’s ok – this time!’. Next earnings season is no doubt set to be more eventful, so enjoy the peace for now and fasten your seatbelts for Easter…


*For illustrative purposes only. Reference to this and any other security is on a historical basis and does not mean that the security is currently held or will be held within an LGIM portfolio. Such references do not constitute a recommendation to buy or sell any security.



[1] BAML – Earnings Tracker – 13 January 2023

[2] BAML – Earnings Tracker – 12 February 2023

[3] JP Morgan Q4 Earnings Season Tracker – 16 February 2023



Camilla Ayling

Portfolio Manager – Active Equities

Camilla is a Portfolio Manager in Active Strategies in London at LGIM. Camilla joined LGIM in 2019 from Rathbones, and prior to that she worked at Barclays. Camilla was featured in Citywire’s 2019 ‘Top 30 under 30’ list and was awarded Investment Analyst of the Year at the 2020 Women in Investment Awards. Camilla graduated from the University of Bath with a BSc (Hons) degree in Economics. Camilla is a CFA charterholder and also holds the Investment Management Certificate, the PRI’s Foundations in Responsible Investments qualification and the CFA Certificate in ESG Investing.

Camilla Ayling