Over the long term, corporate earnings remain an important factor in determining stock value. The economic environment that leads to the likelihood of achieving a higher earnings growth rate is conducive to maintaining momentum in the stock market. But that seems to have remained elusive for some time now. Amid rising interest rates, tech giants are posting weaker-than-expected earnings, and even their advice doesn’t look promising.
The S&P 500 is perhaps the strongest barometer of the earnings and earnings picture of US companies. With shares of nearly 500 leading companies in approximately 11 industries and covering approximately 80% of the market capitalization of US stock exchanges, the S&P 500 is a leading barometer followed by investors globally.
John Butters, vice president and senior earnings analyst at FactSet, walks us through earnings growth for Q1 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 the first quarter of 2021 is 7.1%, which is lower than the five-year average earnings growth rate of 15.0% and below at a ten-year average earnings growth rate of 8.8%. If 7.1% is the actual growth rate for the quarter, it will be the lowest earnings growth rate (year-over-year) reported by the index since the fourth quarter of 2020 (3 .8%).
The lower earnings growth rate in the first quarter of 2022 compared to recent quarters can be attributed both to a difficult comparison with unusually high earnings growth in the first quarter of 2021 and to persistent macroeconomic headwinds. At the company level, Amazon.com is the biggest drag on S&P 500 earnings growth for the first quarter due to the unusually large negative earnings surprise the company reported. If this company were excluded, the S&P 500’s blended earnings growth would drop from 7.1% to 10.1%.
According to Zachs Research – For the 177 S&P 500 companies that reported Q1 results, total profit was up +1.1% on revenue up +11.4%, with 80.8% topping EPS estimates, 72.9% revenue estimates and 62.7% both estimates.
First-quarter EPS and revenue percentages are the lowest since the second quarter of 2020 for this group of 177 index members.
Looking at the first quarter as a whole, total S&P 500 earnings for the period are expected to be up +6.6% from the same period last year, with revenue up +11. .1%. Earnings growth for the quarter fell to +0.5% excluding energy, but improved to +13.3% excluding finance.
While the first quarter earnings season was quite good and reassuring in many ways, we were nonetheless struck by the inability of large companies to beat consensus estimates.
The punishment meted out to Netflix may have been one of a kind, but we’ve since seen many others being punished for failing, but none to the same extent as the streaming giant. General Electric, HCA Holdings and a number of others fall into this category.