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Zacks Earnings Trends Highlights: Nike, Bed Bath & Beyond, Lennar, Oracle, FedEx.

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For Immediate Release

Chicago, IL – July 8, 2022 – Zacks Director of Research Sheraz Mian says, “Excluding the hefty contribution from the Energy sector, total Q2 earnings for the rest of the S&P 500 index are expected to be down -5.6% on +7.5% higher revenues."

How Much Clarity Will Q2 Earnings Season Provide?

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

Here are the key points:

  • For 2022 Q2, total S&P 500 earnings are expected to increase +1.8% from the same period last year on +9.7% higher revenues and net margin compression of 98 basis points.
  • Excluding the hefty contribution from the Energy sector, total Q2 earnings for the rest of the S&P 500 index are expected to be down -5.6% on +7.5% higher revenues.
  • Q2 earnings estimates have gone up for 6 sectors, with the biggest gains in the Energy sector, followed up by Transportation, Basic Materials, Construction, Consumer Staples, and Autos.
  • Looking at the calendar-year picture, total S&P 500 earnings are expected to be up +8.6% in 2022 and +8.8% in 2023. On an ex-Energy basis, total 2022 index earnings would be up +3.1% (instead of +8.6%, with Energy).

Part of the uncertainty in the market at present is related to how earnings estimates should evolve in an aggressive Fed tightening cycle. The market has a sense of what should happen to earnings estimates, but it isn't seeing much of that just yet.

The natural order of things is that rising interest rates take the edge off of aggregate demand, causing the economy to start cooling off. Businesses start experiencing this changed ground reality in their normal operations, which shows up in their quarterly numbers and management's guidance.

We have started seeing some of that already. For example, recent quarterly results and guidance from the likes of Nike (NKE - Free Report) , Bed Bath & Beyond and Lennar (LEN - Free Report) could be indicative of many more such reports as the June-quarter reporting cycle really gets going in a couple of weeks. That said, not every early reporting company is missing estimates or guiding lower, as we saw in the results from Oracle (ORCL - Free Report) , FedEx (FDX - Free Report) and others.

It is reasonable to expect the Q2 earnings season, which will really get going with next week's big bank results, to give analysts a clear directional thrust to adjust their estimates in-line with the economic moderation resulting from Fed tightening. But history tells us that analysts aren't very good at identifying inflection points in the economy.

This suggests that we will likely need to wait some more, perhaps until the Q3 reporting cycle in October, to get clarity on the revisions question. That said, we have had some estimate cuts already, though they are nowhere near what would be consistent with a significant economic slowdown, not to mention a recession.

A very big part of the above positive revisions trend is thanks to the Energy sector. Aggregate S&P 500 earnings outside of the Energy sector have declined -1.1% since the start of the year, with double-digit percentage declines in the Consumer Discretionary (down -15.4%), Retail (-13.9%) and Aerospace (-11.6%) sectors.

Aggregate Energy sector earnings estimates for the year have increased by +74.6% since the start of the year. Other sectors enjoying significant positive revisions since the start of the year include Basic Materials, Autos, Consumer Staples and Construction.

A lot will be riding on how management teams share evolving business trends in their industries on the Q2 earnings calls. But given the lag with which tighter monetary policy seeps through to the broader economy, we may have to wait some more to get greater clarity.

The Overall Earnings Picture

Beyond Q2, the growth picture is expected to modestly improve.

As strong as the full-year 2022 earnings growth picture is expected to be, it's worth remembering that a big part of it is due to the unprecedented Energy sector momentum. Excluding the Energy sector, full-year 2022 earnings growth for the remainder of the index drops to only +3.1%.

There is a rising degree of uncertainty about the outlook, reflecting a lack of macroeconomic visibility in a backdrop of Fed monetary policy tightening. The evolving earnings revisions trend will reflect this macro backdrop.

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