S&P 500 EPS growth for Q2 will come in at 4.3%, the lowest since Q4 2020
Topic for Q2 and H2 2022: Rising interest rates, inflationary pressure, risk of recession
LERI notes that more companies are delaying earnings reports than postponing them earlier, indicating uncertainty on the horizon
Expectations for Q2 report
The second-quarter 2022 earnings season kicked off on Thursday with results from JPMorgan Chase (NYSE:) and Morgan Stanley (NYSE:). After a year and a half of spectacular earnings reports following the COVID-19 bear market, corporate America’s historic earnings growth and enthusiasm are beginning to wane.
According to FactSet, the cumulative EPS growth rate for companies is currently 4.3%. Analysts have started lowering their expectations since the end of the first quarter, giving an expected earnings growth of 1.8 percentage points (the forecast growth for the second quarter as of March 31 was 5.9%), a turnaround from 2021 The Momentum picked up in each quarter’s reporting session. If that’s the final figure, that would be the lowest growth rate since the fourth quarter of 2020, which reported 3.8%. Revenue is expected to grow 10.1%, a sixth quarter of double-digit revenue growth and slightly above estimates of 9.6% on March 31.
Rising interest rates, fears of inflation and recession in focus
Rising interest rates and inflationary pressures will undoubtedly have a strong impact on corporate management in the second quarter. Mention of both of these adversities is increasing this year and will likely continue. The target federal funds rate is now 1.5%, its highest level in three years, and consumer prices rose 8.6% in May 2022, fueling fears of a recession. Expect many companies to address these concerns on the second-quarter earnings call and, as a result, lower guidance for third-quarter and fiscal 2022. According to FactSet, the forecast for the second quarter is already above average. Of the 103 S&P 500 companies that provide guidance, 69% are negative.
Two metrics we specifically see as signs of a decline in business confidence:
LERI (Late Earnings Report Indicator)
For more than 15 years, we have diligently tracked “corporate body language,” the non-verbal cues that publicly traded companies intentionally and unknowingly send to the market. A company can tell its financial health by the timing of its earnings release. Research shows that historically, when a company reports earnings later in the quarter, it usually signals bad news for a conference call. The opposite is true as the opening results date indicates that good news is being shared. The idea is that you’d love to dive into the bad news, but when you have good news you want to run out and share it.
LERI (Late Earnings Report Indicator) captures this sentiment. It examines the number of confirmed earnings dates and whether companies are confirming earnings dates later than or earlier than historically reported. The five-year moving average for this indicator is 172, meaning anything above this average suggests companies are confirming subsequent earnings reports and below this average indicates companies are considering earlier data. Confirm. So far for the Q2 season, we see a LERI of 100, which is below the five-year average but above the previous five-quarter average of 85, suggesting the post-COVID bull market is delighting companies. Start slow. However, it is important to note that 2020 was an anomaly. If we remove this year, the five-year average is 103.
Source: Wall Street Skyline
We are also seeing a smaller number of companies confirming earnings data at this time, with a total of 726 companies confirmed as of Friday, versus a total of 748 last quarter.
Big names like Costco (NASDAQ:) and 3M (NYSE:) are belatedly confirming their next earnings dates. Intel (NASDAQ:) confirmed this on Wednesday, three months later than expected. All of these companies confirm their next earnings date the day after the previous quarter’s earnings date, and we have a confidence score for each, meaning they’re generally pretty consistent. The later than usual confirmation is consistent with the uncertainty and poor prognosis.
Banks started earnings for the second quarter on Thursday
According to data from FactSet, financials are likely to be the biggest laggards when it comes to Q2 earnings growth (-23.9%) and sales growth (2.3%).
According to FactSet, the sub-sectors most contributing to the slowdown in growth are consumer finance (-35%) and banks (-25%). Consumer-related industries have been hurt due to the slowdown in spending due to inflation and recession fears.
Banks are facing a similar surge in many areas. Companies with larger concentrations in mortgage lending such as WFC and JPM will suffer as lending and margins are under pressure and lending has cooled after two years. Freddie Mac (OTC: ) said in a statement on Thursday that the US 30-year mortgage rate fell to 5.3%, the biggest drop in a week since 2008.
Banks are grappling with the current slowdown in IPO activity beginning in the second quarter, with a large chunk of revenue coming from investment banking activities. According to Ernst & Young, 305 deals in the global IPO market generated $40.6 billion in revenue, down 54% and 65% year-on-year, respectively.
While higher interest rates are good for interest income, when interest rates rise too high and hamper economic growth, they begin to erase all profits and become problematic for the bank’s growth.
This quarter will see equity-friendly trading volume for banks and continued high volatility volumes, still driven by retail participation in the markets, will support trading returns.
Thursday 14 July 2022
JPMorgan Chase (JPM) – BMO Earnings Release Conference Call 8:30 a.m. ET
Morgan Stanley (MS) – BMO Earnings Release Conference Call 9:30 a.m. ET
Friday 15 July 2022
Citigroup Inc. (NYSE:) – Earnings Released BMO Conference Call 11:00 a.m. ET
Wells Fargo & Company (NYSE:) – Earnings Releases BMO Conference Call 10:00 a.m. ET
BlackRock, Inc. (NYSE:) – BMO Earnings Release Conference Call 8:30 a.m. ET
PNC Financial Services (NYSE:) – BMO Earnings Release Conference Call 8:30 a.m. ET
US Bancorp (USB) – Earnings Releases BMO Conference Call 9:00 a.m. ET
The Bank of New York Mellon (NYSE: ) – Earnings Releases BMO Conference Call 8:00 a.m. ET
State Street Corp (NYSE: ) – Earnings Releases BMO Conference Call 12:00 p.m. ET
The most important upcoming announcements.
Source: Wall Street Skyline
The peak week of this season will be between July 25 and August 12, with August 4 expected to be the busiest day with 1,087 companies expected to report. At this point, only ~30% of companies (out of our universe of 10,000 global names) have confirmed, so this is subject to change. The remaining data is estimated based on historical report data.
North Americans vs. events around the world.