Thursday, April 14, 2022
Earnings season unofficially got underway yesterday with results from Blackrock, JPMorgan Chase, and Delta Airlines. The results were mixed, with JPMorgan Chase shares selling off on the results amid a sizable Russia-related writedown, Blackrock shares little changed, and Delta shares up 6% on its results.
Delta’s results are encouraging for the travel sector, though we would be careful to translate the news over to the very broad industrials sector and is further along in its recovery while facing a wide range of economic challenges.
The cool reception to financial services results on Wednesday may foretell what will be a challenging quarter. “Financial services companies, particularly the big global banks, faced a number of challenges in the first quarter,” noted LPL Financial Equity Strategist Jeffrey Buchbinder. “The flattening yield curve, Russian sanctions, and a difficult year-over-year comparison after significant loan loss reserve releases in the first quarter of 2021 almost certainly set the stage for lower earnings.”
As shown in the LPL Financial Chart of the Day, energy sector earnings will likely produce by far the strongest earnings growth in the quarter. But on the other end of the spectrum, financials earnings are expected to see a significant annual decline.
The aforementioned macroeconomic challenges coupled with this expected earnings decline were among the reasons LPL Research’s Strategic and Tactical Asset Allocation Committtee (STAAC) downgraded its financials sector view to neutral earlier this month despite relatively attractive valuations. The sector has also experienced price weakness that, from a technical analysis perspective, the Committee thinks may signal continued near-term underperformance. Finally, negative earnings revisions in the month leading up to earnings season, shown in the chart below, suggest some caution is prudent ahead of reporting season, in our view.
The STAAC also downgraded views of industrials and consumer discretionary to negative this month, a stance certainly supported by recent earnings revisions. Those two sectors are generally hurt by high energy costs, Russian sanctions, the China lockdowns, and ongoing supply chain disruptions.
So what sector might be winner this earnings season? The obvious answer is the natural resource sectors, i.e., energy and materials. But perhaps less obvious, we think utilities will be able to grow earnings double-digits. STAAC upgraded its utilities view to neutral this month. The sector may benefit from energy sensitivity and is less exposed to a potential slowdown in the economy.
STAAC’s view of healthcare, another potential earnings winner, is positive. Healthcare quietly generated a 7 percentage point upside surprise to earnings last quarter, is a reopening beneficiary, is relatively less economically sensitive, and is more insulated from supply chain issues and slower growth overseas than the cyclical sectors.
Finally, don’t fall asleep on technology. Our view of the sector is still just neutral but double-digit earnings growth in the first quarter looks likely, while estimates have held up well over the past month despite the global economic slowdown.
For a broader preview of earnings season, look for our newest Weekly Market Commentary, available here at 1pm E.T. on April 18.
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