|By Tim Courtney, Chief Investment Officer|
As investors in stocks, our goals are to generate earnings and cash flows, and over the past few months, estimates for full-year 2022 have been promising. Many times full-year earnings estimates start optimistically but begin to fall as unforeseen obstacles appear and reality sets in. This year, despite several obstacles, estimates are holding steady and we’re seeing the opposite happen; in some cases, estimates are increasing. However, this news is getting lost amid other pressing headlines about the war, inflation, rising interest rates and the yield-curve inversion.
At the beginning of 2022, earnings estimates for the S&P 500 were about $222 a share1, which represents healthy 7% growth over last year, just over the long-term earnings growth rate average. Most recently S&P 500 earnings estimates were around $226 a share.1
So far, the typical pattern of falling estimated profits has not held, despite a war and global supply chain problems. Instead, estimates are rising for a few reasons:
1. Momentum coming into 2022. Last year’s record growth provided momentum into the new year. Growth will no doubt be slowing following such a strong 2021, but households appear to be in a strong enough position (net worth’s near highs due to home prices and stock values near all-time highs) to propel spending higher in 2022.
2. Accommodative monetary policy. While interest rates have risen and certainly caused some concern in markets, rates and monetary policy are still relatively accommodative. The 10-year Treasury yield is at 2.90%, similar to where it stood from 2018 to the beginning of 2019.2 Although rates have risen off of the late 2020 lows, they are not hawkish and the Fed’s balance sheet is still near record levels. Higher borrowing costs will challenge weaker companies, but many companies borrowed heavily in 2020 and 2021 to lock in low rates (even if they didn’t necessarily need cash at the time).
3. Inflation. To a degree, stocks are inflation hedges because, as consumer prices rise, they are captured by companies in higher revenues.3 This is also happening in government revenues at all levels.
The caveat to this is the longer inflation persists, it begins to be both a tailwind and a headwind to companies. It is a tailwind because, as noted above, companies are capturing the inflation in higher revenues. However, as labor and other input costs rise, it could potentially erode profit margins. Additionally, when inflation has lingered at 5% or higher for years, investors much more heavily discount the valuations of companies and their future earnings to account for the inflation.
We’ll continue to watch the estimated earnings and how these factors are affecting 2022 numbers. If you have any questions, please contact your Exencial advisor.
1. S&P Global (data as of 4/22/22) — S&P 500 additional info – index earnings
2. CNBC (4/7/22) — U.S. 10 year Treasury
3. CNBC (3/22/22) — Investing in the stock market is more important than ever amid rising inflation
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971