Welcome to RBC’s Markets in Motion podcast, recorded August 11, 2023. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.

Today in the podcast, our thoughts on 2Q23 reporting season which is winding down.

Three big things you need to know:

• First, the overall stats have been decent, with some clear soft spots - not good enough to fend off a bit of choppiness in the equity market.

• Second, Energy stands out positively at the sector level, along with Health Care.

• Third, we are exiting 2Q23 reporting season a bit of an information vacuum – which seems likely to contribute to choppiness in US equity markets for the time being.

If you’d like to hear more here’s another 5 minutes. While you’re waiting, a quick heads up that the podcast will be off for vacation next week. Now, the details.

Takeaway #1: Overall The Stats Have Been Decent, With Some Soft Spots

We crunched our numbers with 90% of S&P 500 results in and 64% of the Russell 2000.

Here’s what jumped out:

• For the S&P 500, the percent beating consensus on EPS rose from last quarter to 78%, but fell for sales beats vs. last quarter, down to 62%.

• Within the Russell 1000, immediate stock price reactions to both beats and misses came in a little weaker than what we’ve seen over the past year.

• 2023 consensus S&P 500 EPS forecasts have been stable, which is normal halfway through the year in periods where forecasts started too high.

• 2Q23 came in better than expected while expected growth rates for 3Q23 and 4Q23 slipped a bit.

• The rate of upward EPS estimate revisions is ending reporting season at 49%, which is a little bit better than it was early on in reporting season when it got down to around 40%.

How does this feed into our market call? Earnings coming in less bad than feared and building optimism on a 2024 EPS recovery have been positive catalysts for the S&P 500 this year. But what we have seen in 2Q23 reporting season suggests this has largely played out. At the moment, the earnings backdrop simply doesn’t look exciting enough to fend off a pullback in the stock market.

Moving on to Takeaway #2: Energy Stands Out At The Sector Level, Along With Health Care

We’ve been overweight both of these sectors….here’s what jumped out on the stats to us:

• Across the Russell 1000, Energy has seen the best immediate stock price reactions to both EPS beats and misses.

• Within the S&P 500, Energy has also seen one of the strongest upward revisions to 2024 EPS in terms of the anticipated growth rate. Health Care is the other sector that looks strong on this stat.

• While the rates of upward EPS and revenue estimate revisions for Energy (inclusive of current and next year’s EPS) are still in negative territory for S&P 500 Energy, this broader gauge of earnings sentiment is stabilizing.

• Within Small Cap, Health Care is the only sector currently seeing positive revisions for both EPS and revenue forecasts.

Wrapping up with Takeaway #3: Key Themes From Our Reading

• Overall, we exit 2Q23 reporting season feeling a little bit like we’re in an information vacuum… we didn’t see a lot to get excited or miserable about.

• The big overarching theme - last year’s problems and opportunities (topics like inflation, pricing, supply chains, recession) continue to occupy a smaller share of the conversation.

• New themes in focus have been AI and inventory destocking, which haven’t been terribly inspiring when it comes to thinking about future market performance.

• On AI, a lot of investors we’ve spoken with have argued AI is overhyped. Companies appear to have gotten that message. The AI discussion has taken on a defensive tilt, with companies highlighting its potential for job creation and how they’ve already been incorporating AI type tools for quite some time and are developing them now based on customer interactions.

• We also pay attention to outlook discussions in our reading, and that has seemed a bit lacking. Overall, the outlook commentary has generally been fine with most of those who have commented highlighting resiliency, strength despite headwinds, normalization, and ongoing uncertainty. A few companies declined to comment specifically on 2024. And that’s not usual. A lot of companies prefer not to talk about the new fiscal year until January.

• Commentary on current conditions has been mixed, as has been the case throughout reporting season. On the positive side, what stood out to us was how many companies talked about stability last week.

• On the negative side, what stood out to us was commentary about delayed decision making and difficulties closing deals due to macro uncertainty.

• As more consumer companies have reported over the past week and half, the state of the consumers has come into clearer focus. The themes seem mostly the same, with consumer health, resiliency, and strength highlighted. Similar to our prior updates, consumers continue to be described as more value conscious, adapting, and preferring experiences over goods. The student lending issue is on some companies’ radar.

• In terms of last years big topics - Supply chains were generally described as improving.

• Conversations on inflation highlighted anticipated moderation. Some companies highlighted vigilance on costs.

• The geographical discussion continued to tilt negative, particularly on China. One exception to this was in Health Care where the commentary seemed a bit more favorable.

That’s all for now. Thanks for listening. And be sure to reach out with any questions.