Market sectors show resilience as earnings estimates fall

Note: The following is an excerpt from this week’s article. Earnings Trends report. You can access the full report which contains actual histories and detailed estimates for the current and next periods, please click here>>>

Here are the key points:

• The earnings growth of +1.9% expected for the S&P 500 index in the third quarter of 2022 is down from +7.2% at the start of the period. Excluding the energy sector, third-quarter earnings are expected down -4.5% at present, down significantly from +2.1% in early July.

• Third-quarter estimates have been cut for 13 of Zacks’ 16 sectors since the start of the quarter, with the largest declines in the Consumer Discretionary, Consumer Staples, Technology, Retail and Services sectors. conglomerates.

• On the positive side, the third quarter estimates rose the most for the energy sector, but the trend in revisions was also positive for the automotive and utilities sectors.

The overall picture of corporate profitability emerging from the second quarter earnings season, with more than 90% of S&P 500 results released, continues to show the stability and resilience of key earnings drivers such as consumer spending. and businesses.

As this stability and resilience bucks fears of an impending economic slowdown or even recession, we are starting to see telltale signs of emerging weakness in consumer and business spending.

The market appreciated Walmart’s WMT results, but the favorable market reaction was likely more related to fears created by its previous pre-announcement. Excess inventory at Walmart WMT, Target TGT and other retailers was primarily due to changing consumer preferences. But part of the problem could be attributed to the weakness of low-income households due to inflationary pressures.

It makes intuitive sense that this segment of consumers is feeling pressure, as companies in various industries, including AT&T T, have told us. Other households seem to be doing very well, as banks, credit card operators and beyond.

When it comes to enterprise spending, we’ve started to see a squeeze in advertising budgets and hiring plans, but Microsoft MSFT and others haven’t seen anything disconcerting when it comes to software and other spending. services. That said, it is reasonable to expect some moderation in demand trends going forward, as the full extent of the Fed’s tightening cycle ripples through the wider economy.

A slowdown has begun, but there is nothing in earnings data, management commentary or forecasts to suggest that the US economy is headed for a major economic downturn. That said, estimates have started to decline, with the overall trend in revisions turning negative even after factoring in the continued trend of favorable revisions enjoyed by the energy sector.

You can see this in the trend of third quarter estimate revisions in the chart below.

Image source: Zacks Investment Research

Looking at the evolution of Q3 earnings growth expectations excluding energy, the expected growth rate has fallen from +2.1% on July 6 to -4.5% today.

The graph below shows that the aggregate total earnings expected for the whole of 2023 have evolved on a non-energy basis.

Image source: Zacks Investment Research

As you can see above, aggregate S&P 500 earnings outside the energy sector are down -3.4% since mid-April, with double-digit percentage declines in retail. (down -14.6%) and Construction (-10.8%), and single-digit percentage declines for Tech (-9.7%), Industrials (-8.8%) and Consumer Discretionary (-7%).

The overall portrait of earnings

Beyond the second quarter, growth should improve slightly, as you can see in the chart below which gives an overview of earnings on a quarterly basis.

Image source: Zacks Investment Research

The chart below presents the overall earnings picture on a yearly basis, with the growth momentum expected to continue.

Image source: Zacks Investment Research

As strong as the earnings growth expected for the year 2022 is, it should be remembered that a large part of it is due to the unprecedented dynamics of the energy sector. Excluding the energy sector, full-year 2022 earnings growth for the rest of the index drops to -0.1%.

Uncertainty about the outlook is growing, reflecting a lack of macroeconomic visibility amid the Fed’s tightening monetary policy. The evolving trend of earnings revisions will reflect this macroeconomic backdrop.

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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.