S&P 500 Earnings: Things Will Get Worse In 2022 Before They Get Better

Wall Street analysts expect S&P 500 earnings growth to slow in the second quarter of 2022 before recovering by the end of the year. That's according to FactSet, which monitors the performance of the S&P index members' earnings reports and keeps a tally of analysts' estimates.

"During the first two months of the second quarter, analysts decreased earnings estimates for companies in the S&P 500 for the quarter," John Butters, vice president and senior earnings analyst at FactSet, said in a recent post. "The Q2 bottom-up EPS estimate [which is an aggregation of the median EPS estimates for Q2 for all the companies in the index] decreased by 1.3% [to $55.36 from $56.06] during this period."

The downward revision in earnings estimates is widespread as seven out of the 11 sectors included in the index were revised downward, led by the Consumer Discretionary sector (-15.8%) and Communications Services (-7.3%). Conversely, Energy leads the upward revision in the remaining four sectors (+29.2%) and Materials (+8.7%), followed by Real Estate (+3.7%) and Industrials (+3.4%).

What's behind these earnings revisions?

A couple of factors.

One of them is food and energy inflation. These two items take a significant share of the family budget, leaving a smaller allocation for discretionary items. That's not a good thing for publicly listed companies that sell these items, as earnings reports from the nation's largest retailers like Walmart and Target confirmed in the last couple of weeks. Thus, it shouldn't be a surprise that the discretionary sector leads the downward revisions.

While food and energy inflation is bad for companies that sell discretionary items, it's a boon for companies that sell materials and energy, which continued to soar in the last two months. Thus, the upward revisions in these sectors.

Another factor that drives earnings revisions is the Fed's tightening, which has pushed interest rates and the U.S. dollar higher. It's hurting the corporate earnings of the S&P members, which rely on the bond market to raise capital, like utilities, and the earnings of S&P members that draw a big chunk of their earnings from overseas markets. For instance, Microsoft warned Wall Street last week of an earnings shortfall due to the strong dollar.

But some of these factors may reverse course by the end of the year.

For instance, the rally in the U.S. dollar against the euro may ease as the European Central Bank (ECB) begins to raise interest rates next month, and financial markets discount the Fed's hikes. And, hopefully, inflation will ease as monetary tightening tames demand for goods and services. Thus, the optimistic tone of analysts' estimates for the end of the year.