Dive Brief:

• Analysts during July and August cut their estimates more than average for third-quarter earnings per share at Standard & Poor’s 500 companies as the economy showed signs of sputtering after two straight quarters of negative growth, FactSet said.
• The third quarter aggregate EPS estimate fell 5.4% from June 30 to Aug. 31, or more than the average for the first two months of a quarter during the past five, 10, 15 and 20 years, according to John Butters, FactSet Senior Earnings Analyst.
• Nine of the 11 sectors in the S&P 500 saw a decrease in their bottom-up third quarter EPS estimate from July through August, with communications services and information technology declining 12.8% and 9.1%, respectively, Butters said in a report. Analysts during July and August trimmed their aggregate estimates for fourth quarter EPS by 3.5%.

Dive Insight:

Like analysts, CFOs trying to get a picture of future demand are piecing together data that increasingly suggest either weak or negative economic growth.

The economy shrank 0.6% during the second quarter after slumping 1.6% during the first three months of 2022, meeting the common definition of a recession as at least two consecutive quarters of negative growth.

Demand has slowed in response to supply chain constraints, high prices for commodities and energy, and efforts by the Federal Reserve to quash the worst inflation in four decades through an aggressive withdrawal of stimulus.

Fed officials at both of their previous meetings have increased the main interest rate by 75 basis points in their most aggressive reduction in stimulus since the 1980s. A basis point is one hundredth of a percentage point.

Policymakers have suggested in recent weeks that they will raise the benchmark interest rate by 50 or 75 basis points at their Sept. 20-21 gathering, affirming their single-minded focus on returning inflation to the Fed’s 2% target. The consumer price index on an annual basis rose 8.5% in July.

Fed Chair Jerome Powell said on Aug. 26 that while raising interest rates will curb inflation, an increase in borrowing costs “will also bring some pain to households and businesses.

“These are the unfortunate costs of reducing inflation,” he said. “But a failure to restore price stability would mean far greater pain.”

Second quarter EPS reports by many S&P 500 companies fell short of estimates, signaling flagging optimism.

The companies beat EPS estimates during the quarter by an average 3.4% compared with the five-year average of 8.8%, Butters said. Seventy-five percent of S&P 500 companies reported a positive EPS surprise during the quarter compared with a five-year average of 77%.

Walmart felt the pinch from inflation during the second quarter and, on July 25, reduced its profit outlook for fiscal year 2023.

“The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars,” CEO Doug McMillon said.

“We’re now anticipating more pressure on general merchandise” during the next two quarters, McMillon said in an announcement of reduced profit estimates for Q2.

Walmart customers are favoring cheaper food products and brands to buffer against inflation, CFO John David Rainey said during the company’s Aug. 16 earnings call.

Walmart is raising prices on some goods in a way that “preserves its price gaps and allows us to earn market share profitably,” Rainey said.

Within the S&P 500, consumer staples companies from June 30 until Aug. 31 saw an average 5.4% decline in EPS estimates for the third quarter, FactSet said. Estimates for the consumer discretionary sector slumped 8% during the period.