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A Stable Earnings Picture Despite Many Headwinds

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·4 min read
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Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

 

  • For the 181 S&P 500 companies that have reported Q2 results, total earnings are down -4.0% from the year-earlier period on +8.2% higher revenues, with 74.6% beating EPS estimates and 65.2% beating revenue estimates.

 

  • The drag from the Finance sector accounts for most of the earnings decline, with the year-over-year growth pace improving to +6.5% for the companies that have reported when the Finance sector is excluded from the numbers.

 

  • Looking at 2022 Q2 as a whole, combining the actuals that have come out with estimates for the still-to-come companies, total S&P 500 earnings are expected to increase +4.2% from the same period last year on +10.4% higher revenues and net margin compression of 77 basis points.

 

  • Excluding the hefty contribution from the Energy sector, total Q2 earnings for the rest of the S&P 500 index are expected to be down -4.7% on +7.5% higher revenues.

 

The overall corporate profitability picture emerging from the Q2 earnings season, with a little over a third of S&P 500 results out at this stage, continues to show stability and resilience in key earnings drivers like consumer and business spending.

While this stability and resilience runs contrary to worries of an imminent economic slowdown or even a recession, we are starting to see tell-tale signs of emerging weakness in both consumer and business spending. The Walmart WMT preannouncement is probably not solely due to weakness in lower income households, but that consumer segment is nevertheless feeling the squeeze as we heard from companies in a variety of industries, including AT&T T. Other households seem to be doing just fine, as we heard from banks, credit card operators and others.

With respect to business spending, we have started seeing a squeeze on advertising budgets and hiring plans, but Microsoft MSFT and others didn’t see anything disconcerting with respect to spending on software and other services. That said, it is reasonable to expect some moderation in demand trends going forward as the full extent of the Fed’s tightening cycle permeates through the broader economy.

A slowdown has gotten underway, but there is nothing in the earnings data, management commentary and guidance that would suggest the U.S. economy heading into a major economic downturn.

We will likely need to wait some more, perhaps until the Q3 reporting cycle in October, to get clarity on the revisions question. That said, we have had some estimate cuts already, though they are nowhere near what would be consistent with a significant economic slowdown, not to mention a recession.

You can see in the chart below that the aggregate earnings total for this year has actually increased since the start of the year.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

A very big part of the above positive revisions trend is thanks to the Energy sector, which you can see below.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

The chart below shows us the aggregate revisions trend for the S&P 500 index on an ex-Energy basis.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

As you can see above, aggregate S&P 500 earnings outside of the Energy sector have declined -2.1% since the start of the year, with double-digit percentage declines in the Consumer Discretionary (down -17.5%), Retail (-15.8%) and Aerospace (-13.2%) sectors.

Aggregate Energy sector earnings estimates for the year have increased by +84.4% since the start of the year. Other sectors enjoying significant positive revisions since the start of the year include Basic Materials, Autos, Consumer Staples and Construction.

A lot will be riding on how management teams share evolving business trends in their industries on these earnings calls. But given the lag with which tighter monetary policy seeps through to the broader economy, we may have to wait some more to get greater clarity.

The Overall Earnings Picture

Beyond Q2, the growth picture is expected to modestly improve, as you can see in the chart below that provides a big-picture view of earnings on a quarterly basis.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

The chart below shows the overall earnings picture on an annual basis, with the growth momentum expected to continue.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

As strong as the full-year 2022 earnings growth picture is expected to be, it’s worth remembering that a big part of it is due to the unprecedented Energy sector momentum. Excluding the Energy sector, full-year 2022 earnings growth for the remainder of the index drops to only +2.1%.

There is a rising degree of uncertainty about the outlook, reflecting a lack of macroeconomic visibility in a backdrop of Fed monetary policy tightening. The evolving earnings revisions trend will reflect this macro backdrop.


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