As we exit the peak period of earnings season, we review the Russell 2000 Q3 2023 earnings season in more detail, providing both aggregate and company-level insights using data from I/B/E/S, StarMine, and Datastream, which are all found in the desktop solution LSEG Workspace.Earnings commentaryThe Russell 2000 is amid an earnings recession (three consecutive quarters of negative growth) which is expected to last through Q4 of this year.Q3 growth expectations were downgraded aggressively over the summer months, which set the bar lower heading into earnings season. As a result, Q3 earnings season delivered a relative positive surprise which saw blended earnings growth improved by 430 basis points (bps) to -9.9% y/y, while revenue growth improved by 82 bps to -2.9%.Both earnings and revenue growth were negative this quarter and we expect a similar picture next quarter, according to analyst expectations. More specifically, Q4 growth expectations for earnings (-11.0%) has fallen precipitously by 1,500 bps over nine consecutive weeks. Q4 revenue growth expectations have also fallen for the time frame, albeit at a smaller magnitude.Overall, earnings and revenue momentum look weak as both earnings and revenue estimates have been downgraded for the next four and five quarters, respectively. With the Russell 2000 up approximately 9% since the start of earnings season, combined with lower earnings expectations, the forward four-quarter Price to Earnings ratio has risen from 19.4x at the start of earnings season to a current reading of 23.4x. When excluding Health Care (a negative outlier), the P/E declines to 15.4x, which makes the index ‘cheap’ compared to its larger Russell 1000 counterpart which trades at 18.8x.Finally, with lower earnings expectations, we have seen a downward revision to net profit margin expectations for the next six quarters with Q4 seeing the largest decline thus far at 60 bps.Part 1 – Earnings and Revenue Beat/Surprise RateUsing data from the December 14 Russell 2000 Earnings Scorecard, 98.5% of companies have reported results. Of the 1,807 companies that have reported, 61.5% reported earnings above analyst expectations, which surpasses the prior four-quarter average of 58.9% (Exhibit 1).At a sector level, five sectors posted an earnings beat rate above their prior four-quarter average (Financials, Health Care, Industrials, Real Estate, and Utilities).From a breadth perspective, we calculate the following datapoints (of the companies that have reported earnings):

The aggregate earnings surprise factor (actual vs. mean estimate on day of reporting) of 6.7% is below the prior two quarters (Q2: 15.8%, Q1: 16.1%). The largest contributors to the earnings surprise rate are as follows: PBF Energy Inc., Sphere Entertainment Co., Ambac Financial Group Inc., TG Therapeutics Inc., Marathon Digital Holdings Inc., Mueller Industries Inc. and Mr. Cooper Group Inc. This group contributed roughly one-half to the overall earnings surprise rate this quarter.The aggregate revenue surprise of 0.9% is in-line with the prior quarter (0.9%) and below Q1 (2.8%).From a breadth perspective, we calculate the following datapoints (of the companies that have reported earnings):

Exhibit 1: Russell 2000 Earnings Beat RatePart 2 – Earnings and Revenue Growth/ContributionQ3 blended earnings is currently $21.8 billion (-9.9% y/y, -2.3% q/q). This marks the third consecutive quarter of negative y/y growth which marks an “earnings recession” and is expected to last one more quarter based on analyst expectations (Q4 growth rate: -11.0% y/y).Q3 saw a stable bottom-up EPS estimate heading into earnings season (Exhibit 2), as most of the heavy downward revisions to growth expectations occurred from June through August. Since then, the bottom-up EPS blend has improved by $1.23 per share to $18.98.Exhibit 2: Russell 2000 2023 Q3 Bottom-Up EPSThe Q3 growth rate of -9.9% has improved by 430 bps since the start of earnings season.Excluding energy, earnings growth is -5.8% y/y, which is the third consecutive quarter of negative ex-energy growth.From a breadth perspective, we calculate the following datapoints (of the companies that have reported earnings):

Exhibit 3 displays Q3 earnings growth in terms of earnings growth contribution, which provides a clearer way to understand which sectors were driving earnings growth.Heading into the quarter, three sectors were expected to deliver positive earnings growth contribution while eight sectors were expected to deliver negative earnings growth contribution – this can be seen in the blue bars.The black bars (current values) show that nine sectors delivered stronger earnings growth compared to the start of earnings season. Consumer Discretionary saw the largest relative increase, followed by Industrials and Health Care. Communication Services saw the largest relative decrease this quarter.Exhibit 3: Russell 2000 Earnings Growth ContributionOn an absolute basis, we also show a list of the individual companies that had the largest positive (negative) earnings growth contribution this quarter (Exhibit 4).Exhibit 4: Earnings Growth Contribution by Individual CompanyLooking at revenue, Q3 revenue is $469.2 billion (-2.9% y/y, -0.4% q/q). Y/Y growth has increased by approximately 80 bps since the start of earnings season. Excluding energy, revenue growth is -1.8% y/y.Exhibit 5 is a replica of Exhibit 3, except we show current quarter revenue growth contribution. Five sectors saw relative revenue growth contribution increase this quarter, led by Energy, Financials, and Industrials.Exhibit 5: S&P 500 Revenue Growth ContributionPart 3 – Net Profit Margin ExpectationsThe Q3 blended net profit margin (combining estimates and actuals) is 3.5% (Exhibit 6).Utilities saw the largest increase in profit margin expectations this quarter (139 bps, current net margin: 7.0%), followed by Health Care (117 bps, -16.3%), and Consumer Discretionary (80 bps, 3.8%). Real Estate saw the largest decline (-436 bps, -1.8%).At an industry group level (Exhibit 7), Pharmaceuticals, Biotechnology & Life Sciences (1,030 bps) saw the largest increase this quarter, followed by Banks (160 bps) and Utilities (139 bps). Equity Real Estate Investment Trusts (-970 bps) saw the largest decline this quarter, followed by Media & Entertainment (-454 bps), and Telecommunication Services (-205 bps).Exhibit 6: S&P 500 Net Profit MarginExhibit 7: 2023 Q3 Net Profit Margin (Industry Group)From a breadth perspective, we calculate the following datapoints (of the constituents that have reported earnings):

Part 4 – Which companies have seen the largest revisions for next quarter?Using the Screener app within LSEG Workspace for Analysts and Portfolio Managers, we can gain valuable insights to how analysts have reacted after a company releases its financial results.Exhibit 8 shows the 30-day percent change in the consensus mean Preferred Earnings estimate for 23Q4 (i.e., the next upcoming quarter). We include a filter to only include companies that have at least five analyst estimates for the current quarter. Preferred Earnings is defined as EPS for most companies except for Real Estate where it can be either EPS or FFOPS depending on analyst coverage.Exhibit 8.1 is sorted by the largest downward earnings revisions for companies that have already posted results for the current earnings season period (column highlighted in blue). Said differently, we can see how analysts have revised estimates for the following quarter once a company reported results. Note: values less than -100% occur when an EPS estimate turns from positive to negative.Exhibit 8.2 is sorted by the largest upward earnings revisions.We also add additional columns of data for further insight – the first column shows the StarMine Analyst Revision Model (ARM) score. ARM is a stock ranking model designed to show current analyst sentiment and predict future analyst revisions by looking at estimate revisions across EPS, EBITDA, Revenue, and Recommendations over multiple time periods. We note a strong correlation between the 30-day percent change revision in consensus EPS vs. ARM score (i.e., companies that have seen their consensus EPS rise (or fall) significantly are typically associated with a high (low) ARM score.The next two columns show the number of analysts who have upgraded or downgraded EPS estimates for the next upcoming quarter. Finally, we display the expected report date for next quarter along with the StarMine. The PS% is a powerful quantitative analytic that compares the StarMine SmartEstimate© to the consensus mean. The SmartEstimate places a higher weight on analysts who are more accurate and timelier, thus providing a refined view into consensus.Comparing the SmartEstimate to the mean estimate leads to our PS%, which accurately predicts the direction of earnings surprise 70% of the time when the PS% is greater than 2% of less than -2%.The screener app provides a powerful workflow tool for Analysts and Portfolio Managers looking to parse through hundreds of companies during earnings season to identify thematic trends. Exhibit 8.1: 30-day Revision (Negative) for upcoming quarterSource: LSEG WorkspaceExhibit 8.2: 30-day Revision (Positive) for upcoming quarterSource: LSEG WorkspaceConclusionQ3 delivered a relatively positive surprise, albeit from much lower expectations heading into earnings season. The actual earnings and revenue growth rate both finished in the red and we expect a similar picture next quarter based on analyst expectations.More concerning is the downward path of revisions for next quarter and beyond. Both earnings and revenue growth expectations have declined for the next four and five quarters, respectively.Furthermore, net profit margin expectations have also declined for the next six quarters.More By This Author:U.S. Weekly FundFlows: Money Market Funds See First Weekly Outflow In Eight WeeksS&P 500 Earnings Dashboard 23Q3 – Friday, Dec. 15Russell 2000 Earnings Dashboard 23Q3 – Thursday, Dec. 14