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With most S&P 500 companies having reported their second-quarter earnings already, analysts at Goldman Sachs GS-0.82% mapped some of the biggest corporate and economic trends so far.
The global stock selloff last week sparked fears of an economic downturn, with investor anxiety surging on concerns that the Federal Reserve’s fight against inflation cooled the economy too much. While the risk of a recession is not zero, corporate earnings have shone a positive light on the health of the biggest firms underpinning the economy — and their customers.
Of the 87% of the S&P 500 companies that already reported earnings as of Tuesday, 55% beat expectations and just 10% of companies missed, according to a research note by strategists at Goldman published Wednesday. Earnings per share growth also surpassed consensus estimates, as companies continue to post strong profits and revenues that top Wall Street’s expectations.
Here are the three big takeaways from this (almost-complete) earnings season.
A strong labor market
Despite a weaker-than-expected July jobs report, corporate earnings are showing hiring plans and labor market commentary that’s consistent with a healthy labor market, the strategists said.
Unemployment ticked up to 4.3% last month, its highest level in three years. Meanwhile, employers add just 114,000 jobs, falling far short of the 175,000 gain economists had projected.
Goldman economists noted, however, that higher unemployment was primarily driven by temporary layoffs and a temporary surge in labor supply due to job-finding challenges for new immigrants.
In fact, just 3% of the S&P 500 companies that have reported so far have mentioned layoffs. Earnings call commentary has also reflected a better balance between companies’ hiring needs and the available pool of talent, according to Goldman’s analysis.
Mixed, but not poor, consumer health
Companies are recognizing that consumers, while still continuing to spend, are budgeting differently than they were during the pandemic and in the years since. But Goldman strategists have noted a split: Some firms have seen select products come under pressure, while other companies are continuing to see consumer spending hold up.
Earnings results for S&P 500 Consumer Discretionary and Consumer Staples companies show a roughly 60/40 split between earnings beats and earnings misses or results in line with expectations, the analysts said.
Lower-income consumers are bearing the brunt of inflation and are driving much of the existing pullbacks from spending, while wealthier consumers are continuing to stay afloat. Walmart WMT-0.61% said in its earnings release Thursday that share gains grew across income cohorts but were “primarily driven by upper-income households.”
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Amazon AMZN-0.81%, PepsiCo PEP+0.19%, and McDonald’s are among the companies that have noted a more cautious consumer that has become more mindful not only of how much they’re spending, but where they’re putting their hard-earned dollars.
And that’s being reflected in the approach these businesses are taking: 16% of consumer-facing S&P companies mentioned “affordability” in their earnings calls. McDonald’s similarly mentioned the word “value” at least 90 times in its analyst call last week.
The future of AI
Of the S&P 500 firms that have already reported earnings, 41% mentioned AI during their second-quarter earnings calls, Goldman’s analysis found.
From banking to retail, firms are embracing the use of the burgeoning technology to help cut down on time spent doing busy work, streamline customer service, and improve day-to-day operations. Enthusiasm has become built into how executives are talking about the technology.
This earnings season, commentary has centered on just how much investment is needed to capitalize on it. Apple AAPL+2.88% noted that it has invested in AI and machine learning for years and will continue to ramp up investments in the years to come. Microsoft MSFT-0.52% also mentioned continued investment in the cloud and AI opportunity.
The obvious winners in the AI boom have been companies known as “hyperscalers” — Amazon, Google GOOGL-1.00%, Microsoft, and Meta — and the companies that provide AI infrastructure. But AI is having far-reaching effects.
“Outside of the hyperscalers and AI infrastructure companies, other firms highlighted efficiency and productivity gains from the use of AI within their businesses,” the strategists noted.