May 09, 2022

It has been a difficult year for investors as persistent inflation, tightening monetary policy, and geopolitical conflict continue to dominate headlines and drive market volatility. The S&P 500 finished April with a -8.78% decline, the worst one-month slide since March 2020, and investors are understandably nervous about what comes next. In times of uncertainty, corporate earnings can help provide a sense of where equity markets are headed.

During earnings season, companies release their most recent quarter’s financial information and provide guidance. This helps analysts and investors determine how a company might perform going forward and make informed decisions. Typically, when a company’s results beat or miss analysts’ expectations or commentary from management surprises the market, stock prices tend to re-rate, sometimes dramatically. Because economic growth is closely tied to corporate earnings growth, we can also gather important cues on the general direction of the economy.

Q1 2022 earnings season is underway, giving us the opportunity to evaluate how companies are performing in a rising rate environment. 87% of the companies in the S&P 500 have reported actual results for Q1 2022 to date. Of these companies, 79% have reported actual EPS above estimates, which is above the 5-year average of 77%. In terms of revenues, 74% of S&P 500 companies have reported actual revenues above estimates, which is above the 5-year average of 69%. The Q1 2022 earnings picture has been encouraging so far, but positive results haven’t provided much of a tailwind for stocks.

Both earnings growth and revenue growth rates have been improving as earnings season progresses. The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings growth rate for the first quarter is 9.1% today, compared to 7.0% last week and 4.6% at the end of the first quarter.

Positive earnings surprises reported by companies in the Information Technology, Financials, Communication Services, and Health Care sectors have been the largest contributors to the increasing earnings growth rate. The blended revenue growth rate for the first quarter is 13.3% today, compared to 12.3% last week and 10.7% at the end of the end of March, with companies in the Energy and Health Care sectors making the largest contributions to the improving revenue growth rate.

Q1 2022: Earnings Scorecard (As of May 6, 2022)


Source: Strategas Research Partners. Past performance is no guarantee of future results.
Source: Strategas Research Partners. Past performance is no guarantee of future results.

 

If 9.1% is the actual earnings growth rate for the quarter, it will mark the lowest earnings growth rate reported by the index since Q4 2020 (3.8%). However, lower earnings growth in Q1 relative to recent quarters can be attributed to both macroeconomic headwinds and a difficult comparison to unusually high earnings growth in Q1 2021 when compared to Covid-era results. If 13.3% is the actual revenue growth rate for the first quarter, it will mark the fifth straight quarter of year-over-year revenue growth above 10%. Looking ahead, analysts expect earnings growth of 4.8% for Q2 2022, 10.6% for Q3 2022, and 10.1% for Q4 2022. For the full calendar year 2022 analysts are predicting earnings growth of 10.1%.

Last week, as expected, the Fed announced a 50-basis point (0.50%) rate hike and laid the groundwork to shrink its $9 trillion balance sheet with a runoff of $95 billion per month after an initial ramp-up period. Powell highlighted the Fed’s intention to expeditiously tame inflation and said additional 50-basis point rate hikes are on table for the next couple of Fed meetings.

The U.S. economy remains on solid footing despite various negative influences. Consumer balance sheets are still relatively strong, the labor market is robust, and the corporate sector is healthy. Based on history, the U.S. economy doesn’t go into a recession without labor market weakness. Unemployment remains low and initial jobless claims fell to 180,000 at the end of April. We continue to monitor economic data closely. For now, consumer spending and job growth continue to provide support for the economy.

We anticipate persistent volatility as we move into a seasonably weak period of the year. As fundamental, long-term investors, we continue to focus on identifying and owning companies with true earnings growth, sustainable competitive advantage, and capable management teams. This week, 20 S&P 500 companies are scheduled to report results for the first quarter. We’ll be paying close attention to the results.

 


Maryland Capital Management, LLC. 
Last updated May 2022. This material has been prepared solely for informational purposes and is not intended to provide, nor should it be relied upon for, accounting, legal, tax, or investment advice. The information provided herein has been obtained from sources we consider reliable, but we do not guarantee its accuracy or completeness. These materials are subject to change, completion, or amendment from time to time without notice, and Maryland Capital Management, LLC. (“MCM”) is not under any obligation to keep you advised of such changes. The views expressed are those of the author as of the date referenced and are subject to change at any time based on market or other conditions.