Things Get Cheaper Earnings Get Better – The End of the Bear?

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We kick off Q2 earnings season this week, and it should be the bottom of the earnings cycle. 1

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Expectations are for S&P 500 earnings to come in around 4.3% for the quarter, marking the weakest earnings report since pandemic earnings in Q4 2020.

Going forward earnings expectations trend back to much more normalized levels:

  • Q3 2022: 10.2%
  • Q4 2022: 9.3%
  • Full Year 2022: 10.0%
  • Full-Year 2023: 9.4%

It’s very typical for actual earnings to exceed estimates by a large margin in the second quarter. 1

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According to FactSet, “the actual earnings growth rate has exceeded the estimated earnings growth rate at the end of the quarter in 39 of the past 40 quarters for the S&P 500. The only exception was Q1 2020.”

The earnings growth rate looks more like 9%-12% vs. the current 4%. With the S&P 500 forward P/E trading below the 5-year and 10-year average, a doubling of the current estimate can lead to a massive recovery rally in stocks. 2

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The fact is input prices have been dropping in Q2 and that will most certainly benefit companies’ earnings as much as corporate input costs have. 2

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For U.S. manufacturers the biggest input cost is not labor or even energy; it’s raw materials as listed above. 4

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Even wage increases are moderating. Annual changes on a month-over-month basis show some cooling in the very hot labor market. 3

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Are we at the bottom of the bear market? We might just be.

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Tim Phillips, CEO, Phillips & Company



  2. Bloomberg terminal