Over the long term, corporate earnings remain a major factor to determine the value of stocks. The economic environment that leads to probability of achieving a higher growth rate in earnings is conducive for the stock market to remain buoyant. But that seems to remain elusive for some time now. In the backdrop of rising interest rates, tech giants are posting weaker-than-expected results and even the guidance from them doesn’t look promising.
S&P 500 is perhaps the strongest barometer of earnings and profits picture of the American companies. With stocks of nearly 500 leading corporations across about 11 sectors and covering about 80 per cent of the market capitalization of US stock exchanges, S&P 500 is a leading barometer that is tracked globally by investors.
John Butters is Vice President and Senior Earnings Analyst at FactSet takes us through the earnings growth for first quarter earnings. Companies continue to face macroeconomic headwinds, including higher costs, supply chain disruptions, labor shortages, and the military conflict in Ukraine.
The (blended) year-over-year earnings growth rate for Q1 2021 is 7.1%, which is below the five-year average earnings growth rate of 15.0% and below the 10-year average earnings growth rate of 8.8%. If 7.1% is the actual growth rate for the quarter, it will mark the lowest (year-over-year) earnings growth rate reported by the index since Q4 2020 (3.8%).
The lower earnings growth rate for Q1 2022 relative to recent quarters can be attributed to both a difficult comparison to unusually high earnings growth in Q1 2021 and continuing macroeconomic headwinds. At the company level, Amazon.com is the largest detractor to earnings growth for the S&P 500 for the first quarter due to the unusually large negative earnings surprise reported by the company. If this company were excluded, the blended earnings growth for the S&P 500 would improve to 10.1% from 7.1%.
As per Zachs Research – For the 177 S&P 500 companies that have reported Q1 results, total earnings are up +1.1% on +11.4% higher revenues, with 80.8% beating EPS estimates, 72.9% beating revenue estimates and 62.7% beating both estimates.
The Q1 EPS and revenue beats percentages are at the lowest level since the second quarter of 2020 for this group of 177 index members.
Looking at Q1 as a whole, total S&P 500 earnings for the period are expected to be up +6.6% from the same period last year on +11.1% higher revenues. Earnings growth for the quarter drops to +0.5% on an ex-Energy basis, but improves to +13.3% on an ex-Finance basis.
While the Q1 earnings season has been fairly good and reassuring in most respects, we have nevertheless been struck by major companies’ inability to beat consensus estimates.
The punishment inflicted on Netflix may have been one of a kind, but we have since seen many others getting punished for coming up short, though none to the same extent as the streaming giant. General Electric, HCA Holdings and a number of others fall in that category.