Closing the Quarter – Q1’23

With Q1 2023 earnings season in the books, we “Close the Quarter” with some notable themes:

• YoY earnings comps are getting tougher. The number of sectors turning negative from an earnings perspective are increasing, directly contrasting with results from a year ago when earnings were in the green across nearly all sectors.
• The SVB failure catalyzed a flight to quality as investors have rotated back to durable large caps. While the ripple effects are yet to be fully revealed, what we do know is that it triggered a shift back into large-cap technology names and away from other sectors.
• Debt ceiling discussions are being treated as a head-fake by investors, illustrating a stark contrast with debt markets. Despite the 1-year CDS spread reaching its highest level recorded – suggesting debt markets are concerned over a potential default —equity market behavior suggests a much higher level of complacency this time around that a deal will get done without ramifications for the U.S., given lower observed volatility in the VIX.
• In general, executives are holding steady amid increased uncertainty. While most analysts increased their 2023 revenue and EPS estimates for the S&P 500 following better-than-expected Q1 prints, based on our analysis of a basket of 922 companies, the majority opted to maintain annual top-line and earnings guidance.

Guidance Trends

• Revenue: 34% raised, 55% maintained, 11% lowered
• EPS: 41% raised, 47% maintained, 12% lowered

Consensus Trends

• Revenue: 42% increased, 30% no change, 28% decreased
• EPS: 48% increased, 30% no change, 22% decreased

Capital Allocation

To garner insights into capital spending trends, we analyzed the average sector cash allocations within the S&P 500:

• Uses of Cash: 28% capex, 22% dividends, 19% buybacks, 16% dry powder, 10% debt reduction, 5% M&A
• While capex remains the largest cash usage across all sectors on average, it also experienced the largest sequential decline in Q1’23 (-15%) of any capital allocation bucket we analyzed (not a good trend for the broader economy). On a YoY basis, companies have de-emphasized stock buybacks the most and instead focused more on increasing dividends, a sign of cash flow strength.