BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Second-Quarter Earnings Season Coming To A Close With Energy As The Catalyst

Following

Last week, the second quarter earnings season had its second busiest week, with 155 S&P 500 companies reporting. The pace of the second-quarter earnings reports begins to decline precipitously this week, with only 23 S&P 500 companies scheduled to release earnings. 87% of S&P 500 companies have reported results so far, with the percentage of companies exceeding consensus earnings and sales estimates improving to 75% and 70%, respectively.

One of the more fascinating anomalies from this earnings season was companies reporting earnings below consensus estimates rising rather than falling. As one would expect, companies posting earnings below estimates typically decline. According to FactSet, companies missing estimates are unchanged this season, while those exceeding estimates gained 2.1%. While the anomaly has faded from the extreme levels to start the season, it is still evidence that the market is focusing on forward guidance more than usual due to the high level of inflation and the precarious state of the economy.

Blended earnings, which combine actual with estimates of companies yet to report, improved last week and are higher than forecasts at the end of the quarter. The increased earnings growth rate for the industrials is somewhat misleading this quarter since the airlines reported a loss in the second quarter of 2021 and should post a profit this quarter. Six sectors, including energy, industrials, technology, health care, utilities, and consumer staples, are expected to post higher earnings than expected on June 30th. The energy sector has benefited from higher prices, with expected earnings rising again last week.

The blended revenues paint a similar improved picture, with nine sectors having better estimates now than at the end of the quarter. The utilities and energy sectors are the only S&P 500 sectors with stock price gains year-to-date.

The blended earnings performance is exceeding expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter rose to 6.7% year-over-year, above the expectation of 4.1% at the end of the quarter. The energy and health care sectors were the most significant drivers of the improvement in the second quarter blended earnings this week. Despite the increase in second-quarter estimates, expected earnings growth for the calendar year 2022 held steady, implying another decline in the earnings estimates for the second half of the year. Earnings estimates for 2023 declined again this week, with pessimism growing around the state of the global economy.

The energy sector has been the positive driving force behind this earnings season. According to FactSet, earnings would be -3.7% year-over-year for the second quarter if the energy sector was excluded from the calculation.

The cost pressures and inflation are a big part of the story of the struggles outside of the energy sector. Using the differential between consumer prices (CPI) and input costs (PPI), cost pressures on companies are as high as they have ever been since 1948! The last time we saw anything close was in late 1974. Despite the wide spread between consumer and input prices, companies have done an admirable job defending margins. Operating margins are off the highs but have not suffered a steep decline. The recent earnings report from Berkshire Hathaway (BRK/A, BRK/B) highlighted the cost pressures and flagging demand in some areas. A detailed analysis the Berkshire’s earnings is here.

Speaking of price pressures, the July CPI report is eagerly anticipated by market participants on Wednesday. Consensus estimates expect an 8.7% year-over-year print which would be down from the 9.1% in June. Energy prices peaked during June, so the headline inflation number should show some improvement. Alas, the underlying inflation pressures will likely remain. The robust jobs report on Friday probably sealed the fate of another 75 basis points (0.75%) rate hike from the Federal Reserve in September. Still, the details of the inflation reading will be essential to judge the future path of monetary policy. The U.S. Congress is also considering a new tax bill that seems likely to pass along party lines. Assuming it passes the Senate, the House is scheduled to return on Friday to vote on it. The bill currently contains a minimum corporate tax and a buyback tax which would reduce 2023 earnings growth by about three percentage points, according to Strategas.

Follow me on Twitter or LinkedInCheck out my website