November 02, 2022
In spite of all the caution about recession and inflation in Q2 2022, investors were treated to a surprisingly positive earnings season. Over 80% of S&P 500 companies beat, or matched, analyst estimates of their earnings. 70% of companies reported a positive revenue surprise.
However, rather than celebrating, investors and companies have simply punted the negative outlook to the next quarter.
According to FactSet, the number of S&P 500 firms citing “recession” on their calls hit a 12-year high in Q2 2022. Nearly half of the index — 240 companies — cited the term. Though it wasn’t mentioned nearly as many times as “inflation” (412 companies mentioned it) or supply chain (325 companies mentioned it), that’s still something to be vigilant of.
Related: Banks Continue March In Q2 Earnings.
Compounding those fears are some 63 companies which have downgraded their earnings guidance for the coming Q3 2022 quarter, compared to 40 which have issued positive guidance. And even if all the stars align, it looks like this quarter will mark the lowest earnings growth we’ve seen since 2020. FactSet says the estimated growth rate for the index is 3.7% as of Sept. 9, 2022.
Still, the fact that earnings growth could still continue to run amid a tepid environment for stocks and bonds is inspiring to investors. They’ve pushed the S&P 500 up more than 7% since the end of Q2 2022, one indicator that they’re feeling confident about the index’s performance in Q3.
Ultimately, they owe the index’s continued victory to oft-ignored sectors like energy and industrials. Energy, which almost exclusively tracks oil and natural gas companies, has been the index’s largest contributor to earnings growth. The sector grew more than 293% YoY in Q2 2022. With it, the S&P 500 is expected to post a YoY increase in earnings for Q3 2022 — FactSet expects it to come in at 3.7%. But without energy, there would be no growth for the S&P 500, only a backslide into negative growth.
The industrials business has the second-highest earnings growth YoY, up 27%. Much of that growth has come from the aerospace & defense industry, trading companies and distributors, construction firms, and the like. Airlines have had the biggest impact on industrials’ outperformance, though.
Thankfully, both sectors will be here in Q3 2022 — and their influence is expected to remain strong. Energy is expected to see its revenue grow at nearly double the pace as its closest sector compatriot, consumer discretionary, in the quarter. Unsurprisingly, its earnings growth will still be more than a double YoY. And, if the cards fall correctly, it’ll have the help of industrials, real estate, and the consumer discretionary business to pull the S&P 500 up.
This is all an estimate, but estimates obviously change. After all, investors expected Q2 2022 to be a “meh” quarter and it ultimately delivered more exciting earnings. At the end of the quarter, investors were looking for just 3.9% earnings growth — and the index posted a 6.2% increase instead. So even now, after a considerable downgrade in expectations, investors’ estimates for Q3 2022 could prove to be conservative in either direction.
We’ll start reporting on Q3 2022 earnings later this month. Q3 2022 ends for most companies on Sept. 30, 2022. Stay tuned…