Will earnings estimates finally drop?

Note: The following is an excerpt from this week’s article. Earnings Trends report. You can access the full report which contains actual histories and detailed estimates for the current and next periods, please click here>>>

Here are the key points:

  • For the second quarter of 2022, total S&P 500 earnings are expected to rise +2.1% from the same period last year, with revenue up +9.6% and net margin compression of 95 basis points.
  • Excluding the strong contribution from the energy sector, total Q2 earnings for the rest of the S&P 500 are expected to be down -5.2% on revenue up +7.4 %.
  • Q2 earnings estimates for the whole index are down only slightly since the start of the quarter, but they are down significantly on a non-energy basis.
  • Looking at the calendar year chart, total earnings for the S&P 500 are expected to be up +8.9% in 2022 and +9.0% in 2023. On a non-energy basis, total earnings of the 2022 index would be up +3.6% (instead of +8.9%, with Energy).

Some of the uncertainty in the market right now has to do with how earnings estimates are likely to move in an aggressive Fed tightening cycle. The market has an idea of ​​what should happen to earnings estimates, but it doesn’t see much of it just yet.

The natural order of things is that rising interest rates dampen aggregate demand, causing the economy to slow down. Companies are beginning to experience this new reality on the ground in their normal operations, which shows up in their quarterly numbers and management guidance.

We have already started to see some of them. For example, recent comments from homebuilder Lennar LEN on the difficulty of providing its outlook for the next quarter in a rapidly changing interest rate environment show that this interest rate sensitive part of the economy has already started to react to Fed tightening.

We also recently heard from Microsoft MSFT and Salesforce CRM about the negative impact of a strong US dollar on their current quarter results. Earlier, we saw a slew of retailers including Target TGT, Walmart WMT and others releasing quarterly numbers that were weighed down by ongoing macro factors such as inflation, supply chain issues and the moderation / changing consumer spending trends.

It’s far too early to tell how much the estimates will eventually drop. As you can see in the chart below, estimates have barely dropped for the second quarter.

Image source: Zacks Investment Research

A big reason for this “stability” in the aggregate is what is happening to estimates for the energy sector, with rising earnings estimates for energy companies offsetting falling estimates for others.

You can see this in the graph below which reproduces the trend of aggregate revisions on a non-Energy basis.

Zacks Investment Research
Image source: Zacks Investment Research

We have a similar trend at play with estimates for the full year of 2022.

Beyond the second quarter, growth should improve slightly, as you can see in the chart below which gives an overview of earnings on a quarterly basis.

Zacks Investment Research
Image source: Zacks Investment Research

The chart below presents the overall earnings picture on a yearly basis, with the growth momentum expected to continue.

Zacks Investment Research
Image source: Zacks Investment Research

Uncertainty about the outlook is growing, reflecting a lack of macroeconomic visibility amid the Fed’s tightening monetary policy.

The situation in Ukraine is exacerbating pre-existing supply chain issues, which, combined with their impact on oil prices, are weighing on the inflation picture in ways that are difficult to predict. The evolving trend of earnings revisions will reflect this macroeconomic backdrop.

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