Q3 Earnings Reveal Big Dispersion, Bigger Need for Stock Selection

Q3 earnings season had many familiar refrains relative to the year’s first two quarters. One difference was a return to positive earnings growth for the first time since Q3 2022. Still, the market wasn’t unanimously cheering the results. Fundamental Equities investor Carrie King looks at two areas where earnings dispersion may be creating opportunity for stock pickers.

Familiar refrains

Not unlike the first two quarters of the year, earnings for S&P 500 companies largely came in better than expected for Q3, with 62% of companies beating on sales (top line) and 83% on earnings (bottom line). And like the two quarters before, the market had a fairly muted reaction to the better-than-expected results, while the share prices of companies reporting misses were more deeply punished.

But this quarter was different for one key reason: The S&P 500 is set to notch its first quarter of earnings growth in a year, estimated at nearly 5%. That the index may have seen and surfaced from its earnings recession is positive, but the market cannot be painted with a broad brush.

As shown in the chart below, dispersion is evident across sectors, with cyclicals broadly doing better than non-cyclicals despite fears of an economic recession. We also see growing dispersion at the individual stock level and highlight two areas where this may be creating opportunity for stock pickers.

Q3 2023 earnings summary