Breaking down the S&P 500 margin outlook


The first-quarter 2022 earnings season has already begun, with results from 13 S&P 500 members with fiscal quarters ending in February being factored into the official March quarter tally. We have 5 other S&P 500 members on deck to report results this week, including Micron Technology MU, Walgreens WBA and Paychex PAYX.

Geopolitical uncertainty following the situation in Ukraine adds to existing market concerns about inflation and supply chain challenges that have remained recurring themes in recent months. Adding geopolitical tensions to the mix has direct implications for the inflation outlook through higher prices for energy and other commodities. All of this has an impact on the earnings outlook.

We knew all along that earnings growth was expected to slow significantly in the current quarter and subsequent quarters, after remaining very strong in previous periods. But the earnings outlook had started to soften even before recent geopolitical developments. We saw it in the review trend, which had been mixed at best.

The chart below of actual and expected revenue growth on a quarterly basis visually shows this decelerating trend.

Image source: Zacks Investment Research

Earnings for the first quarter of 2022 are currently expected to be up +3.6% compared to the same period last year with revenues up +10.1%. In other words, current bottom-up estimates reflect margin compression, which is consistent with the aforementioned inflationary trends.

Revisions to negative estimates

Revisions to estimates for the first quarter of 2022 are mixed, with estimates for 9 of Zacks 16 sectors down since early January, with the consumer discretionary, transportation and aerospace sectors seeing significant estimate reductions. In fact, first quarter estimates for the transportation sector are down more than a third since the start of the quarter and estimates for consumer discretionary have been reduced by nearly -30%.

Positive revisions to other sectors offset the reductions in estimates, with the energy sector benefiting from the most positive revisions. Other sectors benefiting from positive estimate revisions include medical, automotive and construction.

Without the strong profit growth expected for the energy sector (+193.5% compared to the same period last year), first quarter profits for the other 15 sectors would be down -1.4 % compared to the period of the previous year.

With respect to estimate revisions, first quarter estimates would have declined since the start of the period had it not been for offsetting upward revisions to energy sector estimates.

Overall, Q1 2022 estimates for the S&P 500 index are up +0.1% since the start of the quarter. However, looking at the trend in non-Energy revisions, Q1 estimates for the rest of the 15 sectors are down -1.1% since the start of the quarter.

For the full year 2022, earnings growth of +7% is expected on revenue growth of +5.9%. This would follow earnings growth of +50.1% in 2021.

Earnings estimates for 2022 have risen slightly year-to-date, with total S&P 500 earnings up +1.3% since early January. But there are a lot of cross-currents at the sector level, with estimates falling for 9 of the 16 Zacks sectors and rising for the rest.

In fact, it is the positive revisions in the energy sector that offset the declines in estimates in the aggregate.

Excluding positive revisions from the energy sector, total S&P 500 earnings for 2022 would be down -11.9% since the start of January. The largest declines were recorded in the consumer discretionary, transportation and utilities sectors.

The chart below shows quarterly net margins for the first quarter in the context of how margins have evolved over the past few quarters and what is factored into current estimates for future quarters.

Zacks Investment Research
Image source: Zacks Investment Research

As you can see above, first quarter margins are expected to be the lowest since the fourth quarter of 2020. But current estimates for the second quarter and beyond reflect some improvement in margins. It is this margin outlook that is most likely to weaken in the coming days, given the darkening clouds on the horizon.

For the first quarter, margins are expected to be lower than the prior year level for 9 of Zacks 16 businesses, with significant margin gains for three businesses (Energy, Transportation and Basic Materials).

Zacks Investment Research
Image source: Zacks Investment Research

As you can see from the chart above, the growth picture has changed significantly for the financials and technology sectors, the two largest contributors to index earnings. Total finance sector profits are expected to decline -17.9% year-on-year with revenue up +2.4%, while technology sector profits are expected to decline – 0.8% in the first quarter with revenues up +7.3%.

The chart below shows the quarterly earnings estimate for the first quarter in the context of the actual quarterly totals for the previous 8 quarters and the estimates for the following three quarters.

Zacks Investment Research
Image source: Zacks Investment Research

The chart below shows earnings and revenue growth on a quarterly basis, with expectations for the first quarter of 2022 contrasting with actual growth achieved in the previous four quarters and estimates for the next three.

Zacks Investment Research
Image source: Zacks Investment Research

The scoreboard for the first quarter 2022 earnings season

The first quarter earnings season will really kick off with the big banks releasing their March quarter results in mid-April, but the first reports are already out. As mentioned earlier, recent February quarter results from 13 S&P 500 members are part of our March quarter tally. We’ll have seen those first-quarter results from nearly two dozen S&P 500 members by the time JPMorgan JPM releases its quarterly results on April 13.and.

For the 13 members of the index that have already released Q1 results, total profits are up +10.7% compared to the same period last year on revenues up +14.6 %, with 69.2% beating EPS estimates and 84.6 beating revenue estimates.

Not to overstate these very early results, but the comparison charts below put the Q1 2022 earnings and revenue growth rates for these 13 index members in context with what we had. seen from the same group of companies in other recent periods.

Zacks Investment Research
Image source: Zacks Investment Research

The comparison charts below show Q1 EPS and revenue percentages for these 13 index members in historical context.

Zacks Investment Research
Image source: Zacks Investment Research

The graph below shows the comparable picture on an annual basis.

Zacks Investment Research
Image source: Zacks Investment Research

For a detailed look at the overall earnings picture, including expectations for the periods ahead, please see our weekly Earnings Trends Report >>>> First Quarter Earnings Season Kicks Off

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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