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November 16, 2022

S&P 500 22Q3 Earnings Review: Starting to see the cracks

by Tajinder Dhillon.

Over 90% of constituents have reported 22Q3 results and remarkably, the earnings growth rate has remained relatively unchanged since the start of earnings season.  This is considering the many worries around higher inflation, interest rates, potential margin degradation and recession forecasting.

From the latest S&P 500 Earnings Scorecard, 460 constituents have reported earnings as of Sept 11th, of which 70.7% have reported results above analyst expectations, well-below the prior four-quarter average of 78.1% and above the long-term average of 66.2%.

Industrials (79.1%), Information Technology (79.0%), and Energy (78.3%) have the highest earnings beat rate while Real Estate (58.1%), Communication Services (59.1%), and Consumer Discretionary (60.0%) have the lowest beat rate.

The aggregate earnings surprise factor (actual vs. mean estimate on day of reporting) of 3.4% is also well-below the prior four-quarter average of 7.0% and below the long-term average of 4.1%.  Approximately 43.5% of constituents who have reported earnings beat estimates by more than 5% while 14.0% missed estimates by more than -5%.

Moving to earnings growth, 22Q3 earnings is currently $462.8 billion (+4.1% y/y, -2.2% q/q).  Year-over-year growth has decreased by 0.4 percentage points (ppt) since the start of earnings season. Excluding energy, earnings growth is -3.6% y/y, which is the second consecutive quarter of negative growth and marks a turning point as we’ve only seen this twice before – during the Global Financial Crisis of 2008-2009 and the COVID pandemic of 2020.

Furthermore, if the current quarter growth rate remains below 4.5%, it will be the first time since 2020 Q1 where earnings finished lower compared to the start of earnings season.  It appears that we are starting to ‘see the cracks’ within earnings that have been long forecasted by market pundits.

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Exhibit 1: S&P 500 22Q3 Earnings Growth Rate

Exhibit 2 displays 22Q3 earnings growth in terms of earnings contribution which highlights the strong performance from Energy which was offset by weaker results from Financials, Communication Services, and Industrials.

Heading into the quarter, Energy was expected to deliver the lion share of growth as shown in the blue line (6.3 percentage points (ppt)) and did not disappoint.  Only five of the 23 constituents missed consensus estimates and of the remaining group, Exxon Mobil Corp (XOM.N), Chevron Corp (CVX.N), and Marathon Petroleum Corp (MPC.N) were the largest earnings contributors, delivering 4.5 ppt of the entire sector growth rate and leading the sector to deliver 7.8 ppt (black line) at the end of the quarter.

Weak results from Meta Platforms Inc (META.OQ), Warner Bros Discovery Inc (WBD.OQ), and Alphabet Inc (GOOGL.OQ) dragged down Communication Services, while Boeing Co (BA.N) was largely responsible for the decline in Industrials.

Exhibit 2: S&P 500 Earnings Contribution

To put Exhibit 2 into further perspective, we outline a range of outcomes in the 22Q3 earnings growth rate if we exclude the top and bottom contributors.  We observe a potential earnings growth rate range from -0.2% to +6.9% (+2.3% when excluding both top and bottom contributors)..

More specifically, when excluding the top three positive contributors, the earnings growth rate declines from +4.1% to -0.2%.  When excluding the top three negative contributors, the earnings growth rate improves from +4.1% to +6.9%.  More details can be seen in the table below.

22Q3 Earnings growth rate: +4.1%, if we exclude the top three positive contributors, the growth rate changes to:

    • Ex-Exxon Mobil Corp: +1.5%
    • Ex-Chevron Corp: +3.1%
    • Ex-Marathon Petroleum Corp: +3.4%
    • Ex-Exxon, Chevron, and Marathon: -0.2%

If we exclude the top three negative contributors, the growth rate changes to:

    • Ex-Intel Corp: +5.2%
    • Ex-Meta Platforms Inc: +5.0%
    • Ex-Boeing Co: +4.8%
    • Ex-Intel, Meta, and Boeing: +6.9%

If we exclude both the top three positive and top three negative contributors, the growth rate changes from +4.1% to +2.3%.

Moving to revenue, 22Q3 revenue is $3,713 million (+11.5% y/y, +1.4% q/q).  Y/Y growth has increased by 1.8 ppt since the start of earnings season.  Excluding energy, revenue growth declines to 8.1% y/y.  Of the companies that have reported, roughly 60% have experienced y/y sales growth above the current headline CPI of 7.75%.

Exhibit 3 is a replica of Exhibit 2 except we show revenue contribution.   A similar picture heading into earnings season where Energy was expected to deliver the lion share of revenue growth (blue line) and exceeded market expectations (black line).  Financials, Health Care, and Utilities round up the top four sectors with the largest positive change in revenue growth through the quarter.

Exhibit 3: S&P 500 Revenue Contribution

Using the Earnings Season app in Refinitiv Workspace (Exhibit 4), we note that companies who missed earnings expectations saw an average two-day price decline of 7.0% vs. a 0.9% increase in price for companies who beat expectations.  Interestingly, companies who met analyst expectations saw an average price decline of 3.0% which may signal heightened concerns from market participants considering a tougher macro environment and margin degradation pressure.

Communication Services saw the largest price decline for earnings miss which was led by weak results from Meta Platforms, Alphabet Inc, Walt Disney Co, and Warner Bros Discovery.  Weak advertising spend was of particular concern for Meta and Alphabet.

Consumer Discretionary was most scrutinized by market participants as the average price decline was negative irrespective of earnings beat, match, or miss, highlighting the concern around the health of the consumer, a shift from goods to services, and margin degradation worries.

To access the Earnings Season App, type “EARN” in the search toolbar.

Exhibit 4: Earnings Season App

Source: Refinitiv Workspace

Which companies have seen the largest revisions for next quarter?

Using the Screener app within Refinitiv Workspace, we can gain valuable insights to how analysts have reacted after a company releases its financial results.  Exhibit 5 shows the 30d percent change in the consensus mean EPS estimate for 22Q4 (i.e., the next upcoming quarter).

The first image is sorted by the largest downward earnings revisions for companies that have already posted results for the current earnings season period.  Said differently, we can see how analysts have revised estimates for the following quarter once a company reported results.  Note: values less than -100% occur when an EPS estimate turns from positive to negative.

The second image is sorted by the largest upward earnings revisions.  Here we observe many airlines included in this group including American Airlines (AAL.OQ) where analysts reacted to 22Q3 results by raising the 22Q4 consensus mean EPS estimate upwards by 188.2%.  Other airlines including United Airlines Holdings (UAL.OQ) and Southwest Airlines Co (LUV.N) saw similar upgrades off the back of a strong set of results where many airlines commented on robust domestic demand and a return for international travel, particularly business travel between the transatlantic route.

This provides powerful workflow tools for Analysts and Portfolio Managers looking to parse through 1000s of companies during earnings season to identify thematic trends. 

Exhibit 5: Screener App – 22Q4 30d Revisions

Source: Refinitiv Workspace

Net Margins starting to decline

Margin pressure has been a key theme for the last few quarters as companies battle between passing on higher costs to consumers vs. absorbing them which will impact margins.

We have started to see a decline in net profit margin expectations using Refinitiv Datastream.  The forward 12-month net profit margin for the S&P 500 reached an all-time high of 13.4% in April 2022 and has since declined by 70 basis points to 12.8% as shown in Exhibit 6.

Communication Services has seen the largest decline since the beginning of the year, declining by 300 basis points (15.0% vs. 18.0%), followed by Materials (160 bps), and Health Care (100 bps).  Ex-Real Estate, Energy is the only sector to see its forward 12-month profit margin rise this year which confirms what we have been anticipating for many months.

Margin degradation will feed into bottom-up EPS expectations which have been in a secular downwards trend this year.  The current S&P 500 2023 bottom-up EPS estimate of $231.32 has already declined by 8.2% from its peak of $251.99 in July.

Exhibit 6: S&P 500 Net Profit Margin Expectations


We conclude by highlighting that 22Q3 earnings growth was negative when excluding energy and marks the second consecutive quarter of negative ex-energy growth.  Furthermore, bottom-up EPS and net profit margin expectations have been in a multi-week downward trend.  It is worth noting that the price of the index tends to decline much more rapidly which is then followed by subsequent analyst revisions.  The question remains, have estimates been downgraded enough or is there still more to go?

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