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Previewing the Q2 Earnings Season as Inflation Soars
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It is reasonable for earnings estimates to be coming down in the face of Fed tightening. The reason for that is the ‘second-derivative’ effect, with higher interest rates resulting in slower economic growth which in turn shows up in moderating revenue growth.
There are some in the market that can’t see the Fed getting on top of the inflation problem without pushing the economy into a recession. Variations of this view show up in public comments from prominent business leaders and even the bond market where the yield curve appears again to be heading towards inversion.
A recessionary outcome for the economy is neither the consensus view nor what the Zacks economic team is projecting at present. What everyone agrees on, however, is that the economy should start slowing as the cumulative effect of higher interest rates seep through into the economy.
We are not there yet, as the better-than-expected May jobs report showed last Friday. But we are starting to see some tell-tale signs of moderation, with some companies announcing hiring freezes or even lay-offs. Even the strong May jobs report showed some deceleration in wage gains.
It is still early, but these signs suggest that the Fed’s actions are steering the economy in the desirable direction. That said, the latest inflation reading (May’s CPI report from June 10th) shows that the central bank will need to stay on the inflation-fighting beat for some time before economy-wide pricing pressures will start easing.
To get back to the ‘second-derivative’ effect of moderating economic growth, we note that while earnings estimates have come down a bit, they are nowhere near what would be consistent with a significant economic slowdown.
For example, 2022 Q2 earnings for the S&P 500 index companies are currently expected to increase +1.9% from the year-earlier level on +9.5% higher revenues.
If we look at the revisions trend in the aggregate, at the S&P 500 level, we don’t see a lot of movement, as you can see in the chart below that plots the evolution of aggregate Q2 earnings growth estimates for the index since the start of 2022.
Image Source: Zacks Investment Research
What this chart is showing is that expected Q2 earnings growth in the aggregate has declined from +2.8% on March 30th to +1.9% today.
That said, there are plenty of cross currents at the sector level, with positive revisions to the Energy sector offsetting declines in most other sectors.
The second quarter 2022 earnings estimates for the Zacks Energy sector have increased +47.9% since the start of April.
Energy is not the only sector that has enjoyed positive Q2 estimate revisions; there are 5 other sectors whose estimates have gone up in varying magnitudes.
Since the start of Q2 on April 1st, earnings estimates have gone up for the Transportation, Basic Materials, Autos, Construction, and Consumer Staples sectors. Of these 5 sectors, the upgrade to the Q2 earnings outlook is particularly significant for the Transportation and Basic Materials sectors.
If we look at the aggregate Q2 revisions, after excluding the Energy sector from the mix, then the picture changes, as you can see below.
Image Source: Zacks Investment Research
Pretty much the same trend is at play with revisions on an annual basis, with aggregate estimates stable or even modestly up since the start of the year, but starting to come down on an ex-Energy basis.
I will not share those charts here to keep the length of this piece manageable, but I think it will be useful for you to see what has happened to full-year 2022 earnings estimates for the Energy sector since the start of the year.
Image Source: Zacks Investment Research
Any way you look at it, the Energy sector is in a good place at present, with a very strong earnings outlook. The relatively long-term view of the sector’s earnings picture is highlighted below.
Image Source: Zacks Investment Research
This Week’s Earnings Results
We have three S&P 500 members on deck to report quarterly results this week. These are Kroger (KR - Free Report) , Oracle (ORCL - Free Report) and Adobe (ADBE - Free Report) . Of these three, Oracle and Adobe will be reporting results for their respective fiscal quarters ending in May, while Kroger will be reporting its April-quarter results.
The convention that we and other data vendors use would put this week’s Kroger results as part of the 2022 Q1 tally, while the Adobe and Oracle results will become part of the 2022 Q2 tally.
Please note that Adobe and Oracle aren’t the first S&P 500 members to report Q2 results, as two index members – Costco (COST - Free Report) and AutoZone (AZO - Free Report) – have already come out with fiscal May-quarter results that we categorize as part of our 2022 Q2 tally.
The Q2 reporting cycle will really get going in mid-July when the big banks come out with quarterly results. But we will have counted such Q2 results from almost two dozen index members by then.
The Current Earnings Backdrop
The chart below shows current expectations (and actuals) on a quarterly basis.
Image Source: Zacks Investment Research
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>Breaking Down the Tech Sector’s Earnings Outlook
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Previewing the Q2 Earnings Season as Inflation Soars
It is reasonable for earnings estimates to be coming down in the face of Fed tightening. The reason for that is the ‘second-derivative’ effect, with higher interest rates resulting in slower economic growth which in turn shows up in moderating revenue growth.
There are some in the market that can’t see the Fed getting on top of the inflation problem without pushing the economy into a recession. Variations of this view show up in public comments from prominent business leaders and even the bond market where the yield curve appears again to be heading towards inversion.
A recessionary outcome for the economy is neither the consensus view nor what the Zacks economic team is projecting at present. What everyone agrees on, however, is that the economy should start slowing as the cumulative effect of higher interest rates seep through into the economy.
We are not there yet, as the better-than-expected May jobs report showed last Friday. But we are starting to see some tell-tale signs of moderation, with some companies announcing hiring freezes or even lay-offs. Even the strong May jobs report showed some deceleration in wage gains.
It is still early, but these signs suggest that the Fed’s actions are steering the economy in the desirable direction. That said, the latest inflation reading (May’s CPI report from June 10th) shows that the central bank will need to stay on the inflation-fighting beat for some time before economy-wide pricing pressures will start easing.
To get back to the ‘second-derivative’ effect of moderating economic growth, we note that while earnings estimates have come down a bit, they are nowhere near what would be consistent with a significant economic slowdown.
For example, 2022 Q2 earnings for the S&P 500 index companies are currently expected to increase +1.9% from the year-earlier level on +9.5% higher revenues.
If we look at the revisions trend in the aggregate, at the S&P 500 level, we don’t see a lot of movement, as you can see in the chart below that plots the evolution of aggregate Q2 earnings growth estimates for the index since the start of 2022.
Image Source: Zacks Investment Research
What this chart is showing is that expected Q2 earnings growth in the aggregate has declined from +2.8% on March 30th to +1.9% today.
That said, there are plenty of cross currents at the sector level, with positive revisions to the Energy sector offsetting declines in most other sectors.
The second quarter 2022 earnings estimates for the Zacks Energy sector have increased +47.9% since the start of April.
Energy is not the only sector that has enjoyed positive Q2 estimate revisions; there are 5 other sectors whose estimates have gone up in varying magnitudes.
Since the start of Q2 on April 1st, earnings estimates have gone up for the Transportation, Basic Materials, Autos, Construction, and Consumer Staples sectors. Of these 5 sectors, the upgrade to the Q2 earnings outlook is particularly significant for the Transportation and Basic Materials sectors.
If we look at the aggregate Q2 revisions, after excluding the Energy sector from the mix, then the picture changes, as you can see below.
Image Source: Zacks Investment Research
Pretty much the same trend is at play with revisions on an annual basis, with aggregate estimates stable or even modestly up since the start of the year, but starting to come down on an ex-Energy basis.
I will not share those charts here to keep the length of this piece manageable, but I think it will be useful for you to see what has happened to full-year 2022 earnings estimates for the Energy sector since the start of the year.
Image Source: Zacks Investment Research
Any way you look at it, the Energy sector is in a good place at present, with a very strong earnings outlook. The relatively long-term view of the sector’s earnings picture is highlighted below.
Image Source: Zacks Investment Research
This Week’s Earnings Results
We have three S&P 500 members on deck to report quarterly results this week. These are Kroger (KR - Free Report) , Oracle (ORCL - Free Report) and Adobe (ADBE - Free Report) . Of these three, Oracle and Adobe will be reporting results for their respective fiscal quarters ending in May, while Kroger will be reporting its April-quarter results.
The convention that we and other data vendors use would put this week’s Kroger results as part of the 2022 Q1 tally, while the Adobe and Oracle results will become part of the 2022 Q2 tally.
Please note that Adobe and Oracle aren’t the first S&P 500 members to report Q2 results, as two index members – Costco (COST - Free Report) and AutoZone (AZO - Free Report) – have already come out with fiscal May-quarter results that we categorize as part of our 2022 Q2 tally.
The Q2 reporting cycle will really get going in mid-July when the big banks come out with quarterly results. But we will have counted such Q2 results from almost two dozen index members by then.
The Current Earnings Backdrop
The chart below shows current expectations (and actuals) on a quarterly basis.
Image Source: Zacks Investment Research
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>Breaking Down the Tech Sector’s Earnings Outlook