by Tajinder Dhillon.
As we exit the peak period of earnings season, we review the S&P 500 2022 Q4 earnings season in more detail, providing both aggregate and company-level insights which will help readers better assess the impact of the current macroeconomic environment on corporate earnings.
Using data from the February 17th S&P 500 Earnings Scorecard, 81% of constituents have reported results (88% of aggregate earnings). Of the 405 constituents that have reported, 67.4% have reported earnings above analyst expectations, well-below the prior four-quarter average of 75.5% and slightly above the long-term average of 66.3%. In fact, the current quarter earnings beat rate is the lowest since 2015 Q4.
Only two sectors exceeded its respective prior four-quarter average beat rate, while five sectors had a beat rate above the long-term index average. Information Technology had the highest earnings beat rate this quarter (81.5%) followed by Health Care (81.1%), and Consumer Discretionary (69.4%). Meanwhile, Communication Services (42.1%), Utilities (47.4%) and Real Estate (54.5%) had the lowest earnings beat rate.
The aggregate earnings surprise factor (actual vs. mean estimate on day of reporting) of 1.6% is also well-below the prior four-quarter average of 5.3% and well-below the long-term average of 4.1%. A similar trend to the beat rate reaching a record low, the current surprise factor is also at the lowest reading since 2008 Q4 (Exhibit 1).
From a breadth perspective, 37% of constituents who have reported earnings beat estimates by more than or equal to 5%, while 17% missed estimates by less than or equal to -5%.
Exhibit 1: S&P 500 Earnings Surprise Factor
From a year-over-year growth perspective, 2022 Q4 earnings is currently $443.2 billion (-2.8% y/y, -4.4% q/q). This marks the second consecutive quarter where quarter-over-quarter growth is negative.
Year-over-year growth has declined by 1.2 percentage points (ppt) since the start of earnings season (-2.8% today vs. -1.6%). Excluding energy, earnings growth is -7.0% y/y (Exhibit 2), which is the third consecutive quarter of negative ex. Energy 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, this will mark the second consecutive quarter where the y/y earnings growth rate finished lower compared to the start of earnings season – this has only occurred on two prior occasions since 2009.
Exhibit 2: S&P 500 22Q4 Earnings Growth Rate
Exhibit 3 displays Q4 earnings growth in terms of earnings contribution, which provides a clearer way to understand which sectors were driving earnings growth this quarter.
Heading into the quarter, Energy and Industrials were expected to deliver the lion share of earnings growth while Information Technology and Communication Services were expected to deliver negative earnings contribution – this can be seen in the blue bars.
Moving to the black bars (earnings contribution today), we can see that all but four sectors delivered weaker earnings contribution this quarter compared to expectations on Dec 30th. Health Care had the largest positive earnings contribution on a relative basis, followed by Basic Materials and Consumer Staples. On the other side, Financials, Communication Services, and Energy were the largest relative detractors this quarter.
Exhibit 3: S&P 500 Earnings Contribution
On an absolute basis, we also show a list of the individual companies that had the largest positive (negative) earnings contribution this quarter (Exhibit 4). Many of the largest positive contributors came from Energy and Industrials, while the largest negative contributors came from Information Technology, Financials, and Communication Services.
Exhibit 4: Earnings Contribution by Individual Company
Looking at revenue, Q4 revenue is $3,743 million (+5.3% y/y, +0.5% q/q). Y/Y growth has increased by 1.2 ppt since the start of earnings season. Excluding energy, revenue growth declines to 4.5% y/y. To measure if companies are growing revenues in-line with inflation, we calculate that 50% of the companies that have reported achieved y/y sales growth above the current headline CPI inflation rate of 6.4%.
Exhibit 5 is a replica of Exhibit 3 except we show current quarter revenue contribution. All but three sectors saw their relative revenue contribution increase this quarter, led by Communication Services, Consumer Staples, and Energy. Conversely, Utilities, Consumer Discretionary, and Financials were the only sectors to see their relative revenue contribution decline this quarter.
Exhibit 5: S&P 500 Revenue Contribution
We’ve discussed margin pressures for some time now and most recently in our 2022 Q4 S&P 500 Preview note, which highlighted that net profit margins have declined for five consecutive quarters (S&P 500 22Q4 Earnings Preview: A Reset in Growth Expectations, January 10, 2023).
When comparing the 2022 Q4 y/y revenue growth rate (+5.3%) to the earnings y/y growth rate (-2.8%), it is reasonable to assume that this creates pressure on net profit margins as the rate of increase in costs are greater than top-line sales. This is no surprise given the tight labour market, rising input costs, and higher cost to service debt. Whether companies can sustain pricing power remains to be seen as inflation and supply-chain pressures begins to recede.
The blended net profit margin this quarter (combining actuals and estimates) has declined from 11.2% in December 2022 to a current reading of 10.8%.
Utilities has seen the largest margin decline this quarter (-2.4 percentage points) with a current reading of 10.8%, followed by Financials (-1.1 ppt, current margin: 17.2%), and Energy (-0.8 ppt, current margin: 12.6%). Looking ahead to 2023, the current net margin estimate is 11.3%, which has declined by 50 basis points since December.
Exhibit 6 looks at the difference between earnings growth and revenue growth on a quarterly basis since 2016. A positive bar indicates earnings growth is greater than revenue growth (helping margins) while a negative bar indicates the opposite.
Exhibit 6: Earnings Growth vs. Revenue Growth
2021 saw a sharp rise in margins post-COVID, as supply-chain bottlenecks in conjunction with soaring demand resulted in higher inflation. This led to stronger pricing power and boosted top-line growth for S&P 500 companies. At the same time, companies aggressively reduced their cost base during the height of the pandemic. This dynamic resulted in record levels of profit margins. We validate this by highlighting 2021 Q2, which saw a positive operating leverage of 71.1 percentage points, marking the second highest quarterly value since 2000.
One year later, we are in a new world marked by higher interest rates, commodity prices, and input costs (wages). As a result, 2022 Q4 operating leverage for the S&P 500 is -8.1 ppt, marking the fourth consecutive negative quarterly print and expected to remain negative until 2023 Q2.
Using the Screener app within Refinitiv Workspace for Analysts and Portfolio Managers, we can gain valuable insights to how analysts have reacted after a company releases its financial results. Exhibit 7 shows the 30-day percent change in the consensus mean EPS estimate for 23Q1 (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 (column highlighted in blue). 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.
Exhibit 7.1: 23Q1 30-day Revisions (Negative)
Exhibit 7.2: 23Q1 30-day Revisions (Positive)
We also add additional columns of data in Exhibit 7 for further insight – the first column shows the StarMine Analyst Revision Model (ARM) score. ARM is a stock ranking model designed to show current analyst sentiment and predict future analyst revisions by looking at estimate revisions across EPS, EBITDA, Revenue, and Recommendations over multiple time periods. We note a strong correlation between the 30-day percent change revision in consensus EPS vs. ARM score (i.e., companies that have seen their consensus EPS rise (or fall) significantly are typically associated with a high (low) ARM score.
The next two columns show the number of analysts who have upgraded or downgraded EPS estimates for the next upcoming quarter. Finally, we display the expected report date for next quarter along with the StarMine Predicted Surprise (PS). The PS is a powerful quantitative analytic that compares the StarMine SmartEstimate to the consensus mean. The SmartEstimate places a higher weight on analysts who are more accurate and timelier, thus providing a refined view into consensus. Comparing the SmartEstimate to the mean estimate leads to our PS, which accurately predicts the direction of earnings surprise 70% of the time when the PS is greater than 2% of less than -2%.
The screener app provides a powerful workflow tool for Analysts and Portfolio Managers looking to parse through hundreds of companies during earnings season to identify thematic trends.
In many ways, this quarter behaved in a way that met the expectations of most market commentators – earnings are too high, an erosion of pricing power since the pandemic, and that higher costs will bite into profit margins.
This quarter saw the first negative y/y earnings growth rate since 2020 Q3. When excluding energy, the earnings growth was negative for the third consecutive quarter.
Analysts lowered the bar this quarter by lowering expectations heading into earnings season and still we saw the earnings beat rate decline to an eight-year low, while the magnitude of beats was at a fifteen-year low.
As we head into 2023, we expect to enter an ‘earnings recession’ based on analyst expectations as both 2023 Q1 and Q2 have expected earnings growth of -3.9% and -3.0% respectively. If we strip out energy, we are already in an earnings recession.
Finally, we also note the large number of negative guidance releases (65) for 2023 Q1 compared to positive releases (17), which marks the negative/positive ratio at a near seven year high.
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