3 key takeaways from the second quarter earnings season

The second quarter earnings season turned out to be much better than the market feared.

The proportion of companies beating Q2 consensus estimates has been lower than what we are used to seeing in recent periods, especially during the Covid period. But the beat percentages are nonetheless within the historical range, although true towards the lower end of the spectrum.

It is important to note that the fear of a general negative orientation did not materialize. While some companies lowered their forecasts, most either reiterated their forecasts or raised their outlook. On the revisions front, estimates for the third quarter and beyond have come down, but are not indicative of a major economic downturn.

The following highlights the top three takeaways from the second quarter earnings season.

Firstmost companies beat consensus estimates for EPS and revenue, although beat percentages were relatively lower.

For the 433 members of the S&P 500 that reported their second quarter results through Friday, August 5, earnings and revenue were up +7.7% and +15.4%, respectively, from the same period last year, with 77.4% beating EPS estimates and 69.3% beating revenue estimates. .

The comparison charts below put Q2 EPS and beat percentages in historical context.

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Image source: Zacks Investment Research

The EPS beat percentage of 77.4% is the lowest for this group of 433 index members since the first quarter of 2020. That said, the beat percentage is only slightly below the average of 78, 2% of the last 5 years (previous 20 quarters).

Secondestimates for the current period (Q3 2022) have fallen in recent weeks, with a current earnings growth rate of +2.9% compared to +8.1% in mid-June, as shown in the revisions chart below.

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Image source: Zacks Investment Research

Overall Q3 earnings estimates have fallen -4.6% since mid-June, with 13 of Zacks 16 sectors facing negative revisions and three sectors benefiting from positive revisions.

Estimates fell the most for the Consumer Discretionary, Consumer Staples, Conglomerate and Technology sectors. On the positive side, estimates rose for the energy, automotive and utilities sectors.

The positive trend in revisions for the energy sector has been a persistent feature of the overall earnings picture in recent periods. In this regard, the pattern of revisions in the third quarter is in line with what we have also seen in other recent periods, with higher estimates for the energy sector offsetting cuts elsewhere.

That said, third quarter estimates outside of the energy sector fell relatively more than what we saw prior to the second quarter earnings season.

The chart below shows the trend of Q3 2022 revisions excluding Energy.

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Image source: Zacks Investment Research

Thirdsecond-quarter aggregate earnings for the S&P 500 are on track to hit a new all-time quarterly high, as shown in the chart below.

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Image source: Zacks Investment Research

The main factor that contributed to the second quarter profit record is the successful results of the energy sector, as you can see in the graph below.

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Image source: Zacks Investment Research

File of this week

As of Friday, August 5, 433 members of the S&P 500, or 86.5% of the total number of index members, had released second quarter results. We have 25 other index members on deck to report results this week, including Ralph Lauren RL and media players like Disney DIS, News Corp. NWS, Fox Corp. FOX and others.

Please note that while the second quarter reporting cycle is entering its final phase for these large-cap players, many small- and mid-cap players have yet to release quarterly results. The total number of companies due to report results this week is over 900, with most of them falling into the small and mid-cap category.

The current earnings environment

The chart below shows current expectations (and actual numbers) on a quarterly basis.

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Image source: Zacks Investment Research

Q2 2022 earnings growth of +6.2% on revenue up +13.8% is the “mixed” picture for the quarter, meaning this growth rate represents the actual results of all 433 members of the index and estimates for upcoming companies.

Excluding the strong contribution from the energy sector, second quarter earnings fall from growth to -4.1% decline.

The graph below presents the profit picture on an annual basis.

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Image source: Zacks Investment Research

As we saw earlier in the context of the revisions to the estimates for Q3, a similar downward adjustment is also underway for the estimates for the full year. But growth should still be positive next year and the year after, far from the prospect of a recession.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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