S&P 500 2022 Q4 Earnings Season review.
Intro & Valuation
As the S&P500 earnings season is almost completely finished, it is time for investors to take a deep
dive into the statistics, and reconcile corporate profits and outlook.
Before we look into the numbers, first we should take a note that equity valuations are a product of
price compared to profits or free cash flows.
The premium paid over the corporate profits are influenced by risk free nominal yields and real
yields, as well as earnings growth potential.
That’s the reason it is highly important to factor in the trends of earnings growth and outlook of
profitability into our valuation modells and investment decisions.
The SP500 equity risk premium suggests that the U.S. stock markets appears to be the most richly
valued since 2007 relative to the bond market.
That itself is a potential unfavourable sign, however investors should examine if the corporate
profitability outlook justifies the expansion of the relative valuation.
After all, if US corporations are able to deliver larger earnings growth and higher profitability than in
the previous 20 years, there might be a case to be made for lower risk premiums.
Market level overview
As we are almost at the finish line with the 2022 Q4 corporate earnings season, the results are
somewhat concerning.
The SP500 turned into negative earnings growth of nearly -3.5 %, the lowest since the pandemic.
The earnings surprise factor came in at 1.1 % so far, the weakest since the great financial crisis.
If we exclude the outstandingly profitable sector Energy, the earnings growth is even weaker, below
-7%. The energy sector benefited largley from Russia’s war on Ukraine, sanctions, output cuts and
general undersupply and tight inventories. However the price of oil has come down sharply, and
from the inventory data the demand seems to be softening. That suggest energy companies might
not be able to achieve comparable growth in the current year.
On the revenue front higher inflation boosted the results. Aggregated revenue growth came in at
5.7% nominal, with a 1.8% suprise factor. While nominal revenue growth has been falling sharply
from 2021 Q3 extreme highs, it is important to compare the nominal data with the inflation rate.
When we compare the nominal revenue growth with the inflation data, we can observe, that in the
last quater of the year the inflation rate outpaced the nominal revenue growth. That suggests
demand problems and drop in sales volumes.
If we comapre the inflation – revenue dynamics with the corporate profits, it’s no wonder that the
earnings turned into the negative teritory. Real revenues, or inflation adjusted revenues came in 1.4%. In other words, input prices rose more than output prices eating into corporate profits.
Overall the market level results are suggesting deteriorating revenue and profit conditions for the
U.S. largest corporations and weakness for the U.S. and global demand.
2009-Q2
2009-Q4
2010-Q2
2010-Q4
2011-Q2
2011-Q4
2012-Q2
2012-Q4
2013-Q2
2013-Q4
2014-Q2
2014-Q4
2015-Q2
2015-Q4
2016-Q2
2016-Q4
2017-Q2
2017-Q4
2018-Q2
2018-Q4
2019-Q2
2019-Q4
2020-Q2
2020-Q4
2021-Q2
2021-Q4
2022-Q2
2022-Q4
30
20
15
5
-5
-10
-20
2009-Q2
2009-Q4
2010-Q2
2010-Q4
2011-Q2
2011-Q4
2012-Q2
2012-Q4
2013-Q2
Revenue Y/Y
2013-Q4
2014-Q2
2014-Q4
2015-Q2
2015-Q4
Earnings Y/Y
2 0 1 6 - Q2
2016-Q4
2017-Q2
2017-Q4
2018-Q2
2018-Q4
2019-Q2
2 0 1 9 - Q4
2020-Q2
2020-Q4
2021-Q2
2021-Q4
2022-Q2
2022-Q4
SP500 Revenue and Inflation
250
25
200
10
150
100
0
50
-15
0
-50
CPI Y/Y
INFLATION ADJUSTED REVENUE GROWTH Y/Y
25,0
20,0
15,0
10,0
5,0
0,0
-5,0
-10,0
-15,0
Sector Level overview
Let’s break down the sector level results to develop a better understanding of the dynamics under
the surface.
As we observed previously, energy and industrial sectors were clear outliars in terms of profitability.
Energy sector earnings were up 60% while industrials 40%, with a 13% and a 10% revenue growth on
a year over year basis.
All other sector profits declined during the period, the worst results came from communication
services, materials and consumer discretionary, where profits declined between 15-30 %.
Nominal revenue growth only occured for materials and technology sectors, which is very concerning
considering the 40 year high inflation rate.
Given the dynamics we just discussed, investors shouldn’t be suprised that profit margins were
already deteriorating in the Q3 earning season. Even in the third quarter, only energy and real estate
were able to report margin growth. Based on revenue – inflation dynamics we can observe that
profit margins headed even lower in the final part of last year.
2023 Outlook
Earnings revisions suggests that the conditions has been deteriorating on a sustained basis untill the
end of the year. Analyst have been continously lowered their forecast, on the basis of worsening
economic outlook. The ratio of negative revisions improved in february, however still well being in
the negative territory.
The analysts’ consensus forcasts for 2023 currently states the worst part of the year is expected to be
the first three months, with continous growth on a quarter on quarter basis after. The current
consensus forecast points to a soft landing scenario, where unemployment stays under control and
the economic data rebounds before the second half of the year.
Investors might take a coutious position on the current forecast, as in our opinion risks are weighted
to the downside in the corporate profitability outlook.
Naturally, the forward looking indicators are leading corporate profitability , therefore investors
might keep a close eye on the leading economic indicators before getting confident in the improving
earnings outlook theory for the second half of 2023.
The recent underperformance of growth against value shares probably deriving from the bubble
territory post covid valuation of tech companies, and their sensitivity of real risk free yields.
Their underperformance might suggest a rotation towards growth shares against value, however in
many cases valuations are still very rich, and untill risk free rates are not coming down substantially,
investors might consider limiting the exposure to the growth sectors. Especially considering the
worst earnings results came from communication servicies, while technology was the weekes ont he
revenue front.
The consensus analysts estimates predicts further margin compression in the coming two quarters,
however an improving corporate profit margin outlook for the second half of the year.
Individual Stocks Top/Worst Revisions and Earnings Contribution
Finally, let’s take a look into the individual company level.
On the top of the largest earnings growth companies sits Exxon Mobil, one of the world largest
energy company, operating primarly in the oil sector, benefited from the overall boom in the Oil and
Gas sector. Note, that from the top 10 components 4 companies are in the energy sector as well as 4
from the industrials sector, mostly airlines or aerospace corporations.
As far as the airline and aerospace companies, altough the earnings growth looks attractive, their
financial situation and therefore the share prices were in a highly depressed level since the
pandemic.
The worst earnings growth were delivered mostly by communication services and Information
Technology Companies, such as Amazon, Meta, Intel. Meta is facing major headwinds, as TikTok
represents a huge competition ,and the Metaverse project turned out to be highly capital intensive
with an uncertain rate of return. Amazon ’s pandamic lockdown shine clearly has faded, and had to
write down a 10+ billion USD loss of their stake in Rivian.
No suprise, that the rising rate environment and heavy drop in corporate profits hammered their
share prices from the post pandamic stellar levels. Investors might take into consideration the heavy
layoffs announced by those organizations. While on the surface it might appears to be a cost saving
and profitability boosting move, one might wonder how those CEOs are seeing the future demand
for their products and services.
One key theme was the introduction of ChatGPT, the AI software into Microsoft’s search engine.
Consequently, as Google failed with it’s AI test publicly, the share prices tanked 8% after the earnings
call.
This analysis was about specifically the fourth quater earnings season, if you would like to learn more
about macro drivers behind the U.S. stock market and it’s outlook , please check out our other
materials.