2Q2022 Earnings Update

Through April, approximately half of the S&P 500 Index has reported 1Q22 earnings. This week's Strategy Snapshot examines the key trends coming out of earnings season thus far. The data paints an overall positive picture of corporate earnings. While inflation is hurting the consumer, it is also boosting sales across every sector except Utilities. Most sectors are experiencing some degree of margin pressure, but pricing power is allowing companies to pass through at least some of their increased costs. 

Earnings transcripts highlight the delicate balance companies are striking. Margin pressure is a common topic, as is pricing strategy as companies try to protect their operating and profit margins. A potential bull case scenario is inflation drives strong sales growth and pricing power boosts absolute EPS. If this is the case, positive EPS growth could offset P/E multiple compression and allow the S&P 500 to find its footing heading into 2H22. The remainder of 1Q22 earnings season will help determine the probability of this bull case occurring. In the near-term, refer to Figure 8 on page 4 for a tactical Energy position in the oil refining industry as refining crack spreads widen dramatically. 

Main Points 

• Inflation is boosting sales, and pricing power is allowing companies to pass through some increased costs. 

• Mentions of 'margin' near 'pressure', 'compression', and 'contraction' on earnings transcripts are back near a decade-high. 

• 'Pricing' is being mentioned more frequently around 'strategy', an indication investors are searching for pricing power. 

• 'Inventory' is being mentioned more frequently around 'increase' as companies restock due to fear of missed sales. 

• The headline S&P 500 2Q22 EPS estimate is only up +0.4%, but the data shows sector revisions are diverging. The big takeaway is analysts are increasing EPS growth estimates for commodity-related sectors. 

• A soaring crack spread points to significant upside for both refining stocks and profits. 

• The backdrop of Fed tightening and higher interest rates are offsetting positive EPS growth and upward EPS revisions .