This Week in Earnings

While performances have varied from company to company, EPS beats for the roughly 45% of S&P 500 Industrials that have reported Q3 figures have so far come in at a healthy clip — 65% have topped consensus. That said, this trails the overall EPS beat rate for the S&P 500, which stands at 79%, with only Consumer Discretionary beating EPS estimates at a lower pace. Further, top-line results have tilted more towards misses, with 54% reporting Q3 revenue below consensus versus the broader index average of 43%. 

As noted, while fewer Industrials are lowering annual revenue and EPS guidance than expected, executive tone is decidedly mixed depending on the industry and business trends. Government spending (infrastructure/defense) and other secular tailwinds (such as AI-driven demand, energy transition) continue to contribute to optimism on one hand, while subdued commentary elsewhere as a result of macro uncertainty, sluggish end markets, and a cautious consumer continue to weigh on sentiment on the other. What is certain, however, is that despite these challenges, many were able to deliver positive results through strategic initiatives, cost management, and operational efficiencies. “Outgrowth” and “outpacing soft industry growth” were commonly referenced, as executives tout above market strength in execution despite a soft top-line environment. 

Companies across Aerospace & Defense, which contributed heavily toward the group of companies raising guidance, point to robust demand and record backlogs, but burgeoning concerns about future results due to the potential impact of the Boeing factory workers strike on the supply chain is starting to give some pause. While most in the group delivered another beat-and-raise outcome, the heightened uncertainty led at least one company (Hexcel) withdrawing previously issued mid-term guidance, and others implementing furloughs (Spirit AeroSystems). Similarly, while airline execs point to strong travel demand and an increasingly favorable capacity backdrop, some have tempered growth outlooks for 2025 given the likelihood they will not be receiving the aircraft they had planned for next year. 

Meanwhile, the transportation group remains mired in a longer-than-expected freight recession, but with some signs of bottoming and cautious optimism for an eventual rebound in demand. At the same time, recent hurricanes in the Southeastern U.S. have disrupted those operating in the region, with cleanup and rebuild costs to remain a headwind into next year. 

Further, given continuous mounting headwinds, commentary around 2025 is unsurprisingly noncommittal, with many executives seeking greater clarity on how the upcoming U.S. election will shake out and impact of heightened geopolitical turmoil. 

Globally, trends are mixed. China remains under pressure amid downbeat consumer sentiment and a weak funding environment. While recently announced stimulus efforts offer hope for a demand recovery in 2025, early takes reflect an expectation for softness to persist through the rest of this year. European demand remains muted, while commentary around Latin America is mixed. India remains a relative bright spot. 

In summary, Industrial executive tone is hitting a full octave of notes.  

Key Themes

• Macro and Outlooks – Mixed Views but With Most Executives Commenting on a Continued “Soft” Industrial Environment; Companies Touting Outgrowth to Offset Weakness and Maintain Guides  
• Demand – Trends Vary by End Market, With Executives Pointing to Strength in More Highly Valued Products, but a “Sluggish” Environment in Traditional Manufacturing; Transportation Still Slogging through Freight Recession, While Aerospace & Defense Execs Continue to Tout “Robust” Demand and Record Backlogs  
• Margins – Executives Offset Margin Pressure by Controlling the Controllable and Emphasizing Cost Controls and Pricing Discipline
• Supply Chain – Boeing Machinists Strike Throws a Wrench in Aerospace & Defense Supply Chain; Onshoring and Supply Chain Stabilization Continues Elsewhere
• Global Trends – China Weakness Continues and the Jury is Out on Stimulus Efforts; Europe Mostly Soft, Albeit with Signs of Recovery; Views on LatAm Vary by Industry, while India Remains a Pocket of Strength