Thursday, June 9, 2022
Some high-profile earnings shortfalls and guidance reductions recently from companies such as Target, Walmart, Snap, Microsoft, and others have increased the market’s concerns about overall corporate profits. While we’ve seen some misses and the momentum of S&P 500 earnings has clearly levelled off, earnings per share (EPS) for the index is still estimated to grow 10% in 2022 based on the latest consensus estimate despite the weak finish to earnings seasons (source: FactSet). Also keep in mind that the consensus S&P 500 2022 EPS estimate has risen nearly 3% year to date, indicative of earnings momentum.
“Earnings are slowing, not contracting. If the U.S. economy grows the rest of the year, as we expect, then earnings should support higher stock prices by year end,” according to LPL Equity Strategist Jeffrey Buchbinder. “Maybe earnings grow 5 percent this year and not 10 but given how well margins have held up, earnings may help stocks more than hurt them.”
One way to see slowing earnings momentum is by looking at breadth of estimate increases. As shown in the LPL Chart of the Day, the last several months have seen fewer companies with rising estimates. The percentage of S&P 500 companies with rising estimates in early June 2022 was 38%, below the two-year average of 51% after falling the past two months.
Interestingly, the percentage of companies seeing negative estimate revisions has actually fallen the past three months, meaning more estimates have remained unchanged. That suggests only modest potential downside risk to earnings at this point.
Analysts’ estimates have historically been too high, so maybe the current consensus S&P 500 EPS number of $230 is overly optimistic (our forecast is $225, still up about 8% from 2021). We’re not going to get the roughly 50% EPS growth of 2021, but something around 7% would be a pretty impressive feat in this challenging inflation environment. The long-term average pace of earnings growth for the broad market is about 7.5% annually.
Given recent market declines and resulting lower valuations, it shouldn’t take big earnings gains to push the S&P 500 up 10% from current levels at some point over the next several months. Of course, inflation almost certainly has to come down meaningfully to make that happen. As long as market participants worry that the Federal Reserve might drive the U.S. economy into recession by tightening monetary policy too much, then stocks will have a difficult time making much forward progress. Hopefully Friday’s consumer price index (CPI) report will help.
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