Active investment management’s weekly magazine for fee-based advisors

Q1 2022 earnings season may look different from the very robust quarters of 2021. 

Kiplinger points out,

“The first three months of 2022 will be remembered as a period of extreme volatility for stocks. In addition to red-hot levels of inflation and supply-chain challenges carried over from 2021, Russia’s attack on Ukraine sent markets into a tailspin—and catapulted commodities prices higher. 

“And to combat these higher prices, the Federal Reserve initiated its first rate-hiking cycle in more than three years.

“Earnings take on more importance this time around ‘with valuation expansion potentially tough to come by due to rising interest rates and high inflation,’ says Jeff Buchbinder, equity strategist at independent broker-dealer LPL Financial.”

Barron’s adds regarding profit margins,

“The good news is that corporate sales are forecast to grow briskly in the first quarter, up from expectations earlier this year. 

“The bad news is that corporate profits are expected to grow about half as fast as sales. This margin compression doesn’t bode well for stock prices during earnings season, particularly since the market has run up in recent weeks.

“The earnings should show an economy that continues to steam along, despite rampant inflation and war in Ukraine. Analysts expect first-quarter sales for S&P 500 companies, in aggregate, to have grown 10.7% year-over-year, up from 9.7% expected growth at the start of the year. … With stocks getting more expensive, it’s less likely that they will post big gains after reporting earnings. The S&P 500’s aggregate forward earnings multiple is now about 19.3 times, up from a low of just under 18 times last month. Stock prices are now reflecting a large expected earnings stream in the future.”

Bespoke Investment Group notes that “aggregate next 12-month earnings for the S&P 500 have continued to climb all year regardless of whether equity prices are rising or falling.” 

However, Bespoke also has a cautious perspective on earnings moving forward:

“Over the last couple of seasons, beat rates have started to slow from the extreme levels that were the signature of post-COVID reports; a further deceleration this season remains a major risk given the market’s reliance on earnings in an environment full of negative catalysts for valuations.” 

Earnings outlook

Data and analytics firm FactSet provides the following detailed metrics for the Q1 2022 earnings season:

  • “Earnings Growth: For Q1 2022, the estimated earnings growth rate for the S&P 500 is 4.5%. If 4.5% is the actual growth rate for the quarter, it will mark the lowest earnings growth rate reported by the index since Q4 2020 (3.8%).
  • “Earnings Revisions: On December 31, the estimated earnings growth rate for Q1 2022 was 5.7%. Seven sectors are expected to report lower earnings today (compared to December 31) due to downward revisions to EPS estimates.
  • “Earnings Guidance: For Q1 2022, 67 S&P 500 companies have issued negative EPS guidance and 29 S&P 500 companies have issued positive EPS guidance.
  • “Valuation: The forward 12-month P/E ratio for the S&P 500 is 19.2. This P/E ratio is above the 5-year average (18.6) and above the 10-year average (16.8).”

FIGURE 1: S&P 500 EARNINGS GROWTH (END OF QUARTER ESTIMATE VS. ACTUAL)

Source: FactSet

FactSet notes that the Q1 projected earnings growth rate may be understated, considering the historical precedent of companies exceeding earnings estimates:

“Given that most S&P 500 companies report actual earnings above estimates, what is the likelihood the index will report actual growth in earnings of 4.5% for the quarter? Based on the average improvement in earnings growth during each earnings season due to companies reporting positive surprises, it is likely the index will report earnings growth of more than 10% for the first quarter, which would be the fifth consecutive quarter of (year-over-year) earnings growth above 10%.”

FIGURE 2: PERCENTAGE-POINT CHANGE IN S&P 500 EARNINGS GROWTH RATE
(END OF QTR. TO END OF EARNINGS SEASON)

Source: FactSet

The Energy, Industrials, Materials, and Real Estate sectors are forecast to lead all sectors in terms of Q1 earnings growth, with Consumer Discretionary and Financials lagging significantly.

FIGURE 3: S&P 500 EARNINGS GROWTH BY SECTOR (Q1 2022)

Source: FactSet

The picture for projected Q1 revenue growth looks somewhat different, particularly for the Financials and Utilities sectors. Despite a projected large decline in earnings growth for Financials, revenues are projected to show slightly positive year-over-year quarterly gains.

FIGURE 4: S&P 500 REVENUE GROWTH BY SECTOR (Q1 2022)

Source: FactSet

The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.

New this week:

The dollar’s 8-year cycle

he U.S. Dollar Index is climbing up to its highest level since 2002, which is getting a lot of currency traders excited. U.S. manufacturers are a lot less excited. A more valuable dollar makes it harder to...

Recent Posts:

Helping clients create a lasting legacy

Trevor Cochrane, CRPC • Fort Worth, TXReverb Financial • Securities America Inc.Read full biography belowProactive Advisor Magazine: Trevor, talk about how you see your firm’s mission.The naming of our firm, Reverb Financial, was very intentional. “Reverb” is a term...

Trend-following strategies: Dealing with ‘whipsaws’

Followers of a rules-based, trend-following investment approach know that whipsaws can be the “cost of doing business”—especially if you want to avoid the devastation that can come during severe bear markets. [dropcap style="font-size: 60px; color:...

The dollar’s 8-year cycle

he U.S. Dollar Index is climbing up to its highest level since 2002, which is getting a lot of currency traders excited. U.S. manufacturers are a lot less excited. A more valuable dollar makes it harder to...