Breaking Down the Construction & Housing Earnings Picture

The housing and construction space is one of the economy’s most interest-rate-sensitive areas. Unsurprisingly, the Fed’s extraordinary tightening cycle has been impacting the sector’s earnings picture.

Earnings for the Zacks Construction sector are expected to be down -11.7% this year, with current earnings expectations for even next year (2024) -4.3% below the 2022 level.

We have deliberately used a very long timespan here to visually compare the group’s current profitability with what we saw at the peak of the last housing cycle in the mid-2000s.

Given this seemingly strained profitability picture, how do we account for the Zacks Construction sector stocks’ recent performance?

Regular readers of our earnings commentary know earnings estimates in the aggregate for the S&P 500 index, as well as for the constituent sectors, peaked in April last year and fell sharply afterward. Estimates kept coming down through April 2023 and have meaningfully stabilized in the aggregate for the index. In fact, estimates have started going up for several sectors, including Construction, since then.

The bottom line here is that interest rates are key to the Construction sector’s profitability and outlook; the market sized up the impact of the new policy regime earlier this year and has largely stuck to that somewhat benign outcome (also referred to as ‘soft landing’) ever since.

The more recent stock market weakness in the group likely reflects the so-called ‘higher-for-longer’ monetary policy outlook that has been taking hold lately.

As long as the Fed outlook and the economic outcome expectations don’t change meaningfully, one can reasonably expect the Construction sector stocks’ performance momentum this year to largely remain in place.

Q2 Earnings Scorecard (As of Friday, August 25th)

The Q2 reporting cycle is effectively over now, with results from 486 S&P 500 members, or 97.2% of the index’s total membership, already out.

We have over 100 companies reporting results this week, including 12 S&P 500 members. Broadcom, Best Buy, Lululemon, and Salesforce are among this week’s notable companies reporting results.

For the 486 S&P 500 members that have reported already, total Q2 earnings are down -7.4% from the same period last year on +1.05% higher revenues, with 79.6% beating EPS estimates and 65.8% beating revenue estimates.

Please note that earnings growth for the index would be -1.1% instead of -7.4% once the Energy sector’s drag is excluded from the results.

The Earnings Big Picture

Please note that the -7.2% decline for Q2 earnings on +1% higher revenues is the blended growth picture for the quarter, which combines the actual results that have come out with estimates for the still-to-come companies.

Q2 is on track to be the third quarter in a row of earnings declines and the first quarter of declining revenues. As noted earlier, a big part of the earnings and revenue weakness is due to the Energy sector.

Excluding the Energy sector drag, Q2 earnings would be down -1% on +4.8% higher revenues.

2023 Q2 will be the 6th consecutive quarter of declining margins for the S&P 500 index.

Margins in Q2 are expected to be below the year-earlier level for 7 of the 16 Zacks sectors, with the biggest margin pressures expected to be in the Energy, Medical, Basic Materials, and Construction sectors.

With the earnings focus lately on the Tech sector, it is instructive to see how much distance has been covered on the margins front in this key sector.
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