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Charting the Market: Earnings Season Preview

  • S&P 500® firms are projected to post earnings-per-share (EPS) growth of 4.5% for Q1 2022, the lowest rate since Q4 2020
  • The Q1 2022 growth rate is now lower than it was at the start of the year, setting up for a potential underpromise, overdeliver scenario
  • Don’t be pessimistic about the single-digit projected growth rate. If the typical surprises occur, the quarter could end with a double-digit growth rate

Head of SPDR Americas Research

The market has been existing in a fundamental vacuum lately. Shortly after the Q4 2021 earnings season reached a fever pitch, Russia invaded Ukraine and hawkish Federal Reserve rhetoric grew louder.

As first quarter results are released, with more than 68% of the S&P 500 Index market cap reporting by the end of the month, investors will get an in-depth look into how firms have handled the spillover effects of macro risks: war, inflation, a stronger dollar, higher rates, and higher commodity prices.

Coming into quarter end, however, analysts seem to have lost confidence in the potential for strong first quarter results. In this Charting the Market, I explore why this quarter may end up being better than expected, as well as what sectors rank highly on a quantitative earnings sentiment screen.

Expectations Revised Downward, But Room for Improvement

With a war, higher rates, and inflation creating elevated levels of macro uncertainty, analysts have been revising downward Q1 2022 figures. At the start of the year, projected growth for Q1 was 5.7%.1 Now, projected growth is 4.5%, the lowest year-over-year growth rate since Q4 2020.2

This is still higher than all of 2019, though. And it’s worth keeping in mind that some of the low, single-digit growth rates are from hard year-over-year comparisons given the sizeable increase in 2021 over 2020.

Year-over-Year EPS Growth (%)

Year-over-Year EPS Growth (%)

Underpromise, Overdeliver Earnings Season Scenario?

The downside analyst revisions also coincide with a higher-than-normal rate of firm negative guidance, as roughly 70% of the firms that have issued guidance for Q1 2022 have expressed negative views, below the typical 60% negative guidance view rate.3

In my view, this sets up a potential underpromise, overdeliver scenario, with firms projecting a lower bar that may be easier for them to surpass. And, on average, firms do beat the bar set by the market. Historically, 77% of firms report earnings above the average analyst estimate.4

As a result, final quarterly numbers are typically higher than forecasted. In fact, over the last ten years, the average increase in actual quarterly earnings reports above what was estimated is 6.5%.5

As shown below, more recent average increases are higher (5 years, 8.9%6), given the boost from quarterly earnings results during the pandemic that coincided with significant beats due to an elevated level of analyst dispersion and uncertainty. This is also evident as the median (6.1%) is lower than the average.

Actual Results Percentage Point Increase Above Estimated Growth Projections (%)

Actual Results Percentage Point Increase Above Estimated Growth Projections (%)

If any of those rates are applied, the final quarterly figure could result in double-digit growth (11% based on the 10-year average, 10.6% for 5-year median, and 13.4% on the 5-year average). That would be a strong growth rate – and higher than the 5-year average and median growth rates – to support a market that witnessed increased macro risk, macro-driven drawdowns, and increased episodic volatility. The latter is supported by the fact that in the first 100 days of 2022, the S&P 500 Index has broken down through its 200-day moving average three times — and has also broken above it twice.7

Strength Beneath Headline Numbers

While overall headline numbers have been revised lower, the downside revisions have not been broad-based.

For instance, mid-cap stocks have witnessed a modest 10 basis point revision higher, with 15.31% growth now projected.8 Additionally, small caps have only witnessed a slight downside revision and are still projected to grow earnings by 13% in Q1.9

Large caps are the only ones not projected to have double-digit growth. Yet that changes if you look beneath the surface. For instance, were it not for Financials, projected growth would be 14.5%. This figure would have also been revised higher by three percentage points throughout the quarter, as non-financial firms, in aggregate, had expectations revised higher.

The weakness in Financials stems from loan loss provisions and hard year-over-year comparable figures. Given the weakness is from one-time effects, there is more room for upside surprises to help the overall figure.

At the same time, however, this double-digit ex-Financials strength is being propped up by sizeable growth projections in Energy (+240%).

As shown below, when controlling for certain styles/sectors on both ends of the positive and negative spectrum, growth prospects are not evenly distributed across the market as certain sectors are more in favor than others.

This is further reinforced by the fact that five out of 11 sectors have higher projected growth now than they did at the start of the quarter. Cyclical and inflation-sensitive sectors are leading the way, naturally.

Projected Q1 2022 EPS Growth (%)

Projected Q1 2022 EPS Growth (%)

Better Days Ahead with Higher EPS Revisions

While the first quarter headline figures have been revised lower, that is where the downside revisions end for this year.

As shown below, every quarter for the rest of the year has had its estimates revised higher since the start of the year, and full-year figures have been upgraded from 7% to 9.2%. Small caps are projected to have 12% growth, the highest out of any cap spectrum.10

Year-to-Date 2022 EPS Revisions by Quarter

Year-to-Date 2022 EPS Revisions by Quarter

This upbeat optimism for future quarters is supportive for the market, and this long-term view of earnings sentiment can help investors look through a very macro-impacted quarter. In fact, blending short-term guidance with full-year 2022 projections at the sector level can help form a view on earnings sentiment.

Energy and Materials have witnessed the largest upside revisions to their full-year figures, while Financials have had more upgrades than downgrades — a promising sign for a sector under pressure this quarter.

When ranking the four metrics and averaging them together to create a combined sentiment score, Energy, Materials, and Real Estate rank as the top three. For Energy and Materials, this aligns with the quarterly forecasts as well.

2022 Earning Sentiment Screen

2022 Earning Sentiment Screen

Focus on Markets with Strong Earnings Sentiment

The fundamental news vacuum that the markets have been existing in is likely to give way to a fundamental echo chamber over the next few weeks. Breaking news headlines related to the latest FedSpeak will be replaced with corporate announcements, news, and reports.

Analysts will be able to press executives on how they are stewarding their firm through these rocky macro waters, and key words such as “supply chain,” “inflation,” “labor shortage,” and “Ukraine-Russia” will be intensely monitored.

Focusing on those markets with strong earnings sentiment (Energy, Materials, Small Caps) may be helpful as we enter an earnings season that will have some strength, even amid the weakened headline projections.

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