Thomas AlonsoTajinder Dhillon
August 2, 2022

S&P 500 22Q2 Halfway Review: Growth Holding Up Driven by Energy

by Thomas Alonso and Tajinder Dhillon.

As we move past the halfway mark of 22Q2 earnings we look at what results have brought us so far, and what’s expected for the rest of the quarter.

Growth coming in ahead of expectations

Growth has remained resilient with the current 7.7% blended earnings growth rate increasing two percentage points (ppt) from the expected 5.7% at the start of the quarter. Revenues are also coming in ahead of expectations with the 12.1% blended growth rate up 1.5 ppts from the beginning of the quarter.

Exhibit 1: S&P 500 YoY Growth Rates July 1 vs. August 1

    Source: S&P 500 Earnings Scorecard July 1, 2022

  Source: S&P 500 Earnings Scorecard August 1, 2022

Despite the overall improvement in earnings growth, we note that six of the 11 sectors have seen their growth rate decline since July 1, and as we noted in our earnings preview (HERE), overall growth ex. energy has been negative (Exhibit 2).  The consumer discretionary sector has seen the largest decrease in expected growth among sectors with a 7.8 ppt decline since July 1. On the other side, energy continues to move up with the blended earnings growth rate up 62.2 ppts from July 1 with less than half of the sector having reported earnings. 

Exhibit 2: S&P 500 Sector Earnings Growth

If we maintain the current 22Q2 earnings growth rate of 7.7%, it would be the slowest pace of growth since 20Q4 and below the long-term (since 1994) average growth rate of 10.9%.

Revenue growth has improved to 12.1% from 10.6% and remains above the long-term average of 6.0% as top line growth likely benefits from rising prices and higher pricing power for larger companies (Exhibit 3). Only four sectors have seen a decline in expected revenue growth, with the financial sector’s 0.4 ppt decline the largest. The energy sector again shows the greatest increase in expected revenue growth with a 15.1 ppt increase.

Exhibit 3: S&P 500 Sector Revenue Growth

Earnings growth when excluding energy

We can see the importance of the energy sector on 22Q2 earnings expectations as the current forecast of 7.7% has improved from 5.7% over the last month, but ex-energy, the earnings growth rate has declined slightly from -2.6% to -2.4%

Companies have highlighted continued inflation concerns and the impact on profit margins which has led to further downward revisions to earnings growth expectations for the rest of 2022.  Since July 1st, 22Q3 earnings growth ex. Energy has declined 4.0 ppts from 5.8% to 1.8%.  For 22Q4, growth expectations have declined 3.4 ppts from 7.9% to 4.5% as shown in Exhibit 4.

Exhibit 4: S&P 500 Earnings Growth excluding Energy

Exhibit 5 shows full year 2022 and 2023 estimated S&P earnings growth with and without the energy sector.  For 2022, we can see that the impact of strong energy earnings has increased, as the spread between S&P 500 earnings growth and growth ex-energy had widened to 6.2 ppts from 5.4 ppt one month ago. We would also note the recent decline in 2022 estimated EPS growth as the lower 2nd half estimates noted above seem to be driving down full year estimates.

Exhibit 5: 2022 and 2023 S&P 500 Earnings Growth excluding Energy

2022

2023

Full-Year estimates turning down

For most of the year, 2022 and 2023 earnings growth expectations continued to rise as bottom-up EPS estimates for the S&P 500 generally increased (Exhibit 6). However, since the beginning of earnings season, bottom-up estimates have started to decline, turning down ~1.0% for 2022 and 2.0% for 2023 since July 1st. Despite the recent decline, 2022 estimates are still up 1.6% from the start of the year, and 2023 estimates are flat (+0.2%).

Exhibit 6: Bottom Up EPS Estimates for S&P500

Net Margins starting to decline?

As noted above, margin pressure has been a key theme during earnings call from management who have highlighted continued inflation pressure with some companies passing on higher costs to consumers while others have absorbed them.

The forward 12-month net profit margin for the S&P 500 reached an all-time high of 13.4% earlier this year and has slightly come down since July 1st to 13.3% as shown in Exhibit 7.

Materials has seen the largest decline over the month, declining by 40 basis points (12.8% vs. 13.2%), followed by Information Technology (20 bps), and Financials (20 bps).  Energy has seen margins increase by 20 bps (11.6% vs. 11.4%).

Exhibit 7: S&P 500 Net Profit Margin

While results in the aggregate have been better than expected to date with growth driven by energy earnings and continued strength in margins, it remains to be seen if this can continue. Forward estimates have moved lower recently, but the overall magnitude has been far less than the decline in the S&P 500 and could argue for a continued rebound from recent market lows.

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