For Immediate Release
Chicago, IL – June 23, 2022 – Zacks Director of Research Sheraz Mian says, “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 -5.2% on +7.4% higher revenues.”
Will Earnings Estimates Finally Come Down?
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,
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Here are the key points:
· For 2022 Q2, total S&P 500 earnings are expected to increase +2.1% from the same period last year on +9.6% higher revenues and net margin compression of 95 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 -5.2% on +7.4% higher revenues.
· Q2 Earnings estimates for the index as a whole are only modestly down since the start of the quarter, but they are down significantly on an ex-Energy basis.
· Looking at the calendar-year picture, total S&P 500 earnings are expected to be up +8.9% in 2022 and +9.0% in 2023. On an ex-Energy basis, total 2022 index earnings would be up +3.6% (instead of +8.9%, with Energy).
Part of the uncertainty in the market at present is related to how earnings estimates should evolve in an aggressive Fed tightening cycle. The market has a sense of what should happen to earnings estimates, but it isn’t seeing much of that just yet.
The natural order of things is that rising interest rates take the edge off of aggregate demand, causing the economy to start cooling off. Businesses start experiencing this changed ground reality in their normal operations, which shows up in their quarterly numbers and management’s guidance.
We have started seeing some of that already. For example, recent comments from homebuilder Lennar
LEN
about the difficulty in providing its next-quarter outlook in a fast-evolving interest rate environment shows that this interest rate-sensitive part of the economy has already started to respond to Fed tightening.
We also heard recently from Microsoft
MSFT
and Salesforce
CRM
about the negative impact a strong U.S. dollar is having on their current quarter results. Earlier we saw a host of retailers, including Target
TGT
, Walmart
WMT
and others come out with quarterly numbers that were weighed down by ongoing macroeconomic drivers like inflation, supply-chain issues and moderating/shifting consumer spending trends.
It is way too early to tell how much estimates will eventually come down.A big reason for that ‘stability’ in the aggregate is what’s happening to Energy sector estimates, with rising earnings estimates for Energy companies offsetting declining estimates for others.
We have a similar trend at play with estimates for the full year 2022.
Beyond Q2, the growth picture is expected to modestly improve. 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 Ukraine situation is exacerbating pre-existing supply-chain issues, which combined with its impact on oil prices, is weighing on the inflation situation in hard-to-predict ways. The evolving earnings revisions trend will reflect this macro backdrop.
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