Preview of the first quarter earnings season

The first quarter earnings season kicks off later this week, led by JPMorgan and some of the other big US banks. This time round, investors will be keen to know how the turbulent economic environment that mixed four decade-high inflation, rate hikes and geopolitical tension impacted the performance of corporate America and the rest of the world. While the data is promising, there is a slowdown in earnings growth which is causing the market to be wary.

In general, analysts still expect earnings growth for the S&P 500 and the consensus for Q1 growth has even edged higher over the past few weeks. In fact, analysts at US financial data group FactSet estimate an earnings growth rate of 4.7 per cent for S&P 500 companies, which would mark the lowest earnings growth rate for the index since Q4 2020.

The real takeaway however is that almost all of the growth is due to one single sector which is the energy sector. In fact, as things stand today, there are seven sectors with declining earnings outlooks and four sectors expecting earnings decline while the energy sector is expected to post earnings growth of over 150 per cent. Digging a little deeper, the consensus estimate for the energy sector has been on the rise in tandem with rising oil prices. While the expectations for energy sector earnings have been rising robustly, the outlook for just about every other sector is worse or worsening.

Taking a more extended view, earnings per share growth in 2022 for companies around the world (as measured by the MSCI All Country World Index) is currently expected by FactSet analysts’ consensus to be up 6 per cent. Prior to Russia’s invasion of Ukraine, the consensus was at 7 per cent, a difference of 1 per cent. Higher post-invasion forecasts in the energy, materials and industrials sectors partially offset modest decline across other sectors.

Geographically, earnings per share estimates for 2022 show that the rising trends in the US, UK, and Japan have not changed much this year. Despite Europe’s proximity to the conflict and its dependence upon Russian energy supplies, earnings growth is still expected to be higher, than it was at the start of the year, though lower by about 1.5 per cent from pre-invasion levels. Although forecasts for the year are usually raised during the earnings season, as companies typically exceed quarterly estimates, there is greater uncertainty this season given the Ukraine conflict, inflation, and lingering Covid-19 waves.

One of the best leading indicators of the trend in earnings expectations is the global manufacturing purchasing managers’ index (PMI). This survey of business leaders from companies around the world is typically about three months ahead of analysts’ forecasts for earnings over the coming 12 months. The level of 50 on the PMI is the threshold between expansion and contraction in manufacturing and tends to align with the outlook between growth and decline in earnings for all companies over the coming year.

The March final PMI readings across major world economies such as the US and the Euro area remained resilient, despite the war, reflecting only a small slowdown in the latter region and an actual acceleration in the US. As such, the trend confirmed that the outlook for earnings growth is likely to continue over the next few months, possibly though at a lower rate.

Of course, the future direction of the PMI and the outlook of earnings remains tied to the impact of the war and sanctions, among many other factors that include inflation and central bank actions. Further escalation of sanctions may have greater earnings impact as the current sanctions have been cautiously implemented to avoid disruption of energy supplies. However, investors may take some comfort that the earnings impact so far has remained modest and global companies appear to be on a path for earnings growth this year.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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