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:
- 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.
- 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).
- 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.
- S&P Global (data as of 4/22/22) — S&P 500 additional info – index earnings
- CNBC (4/7/22) — U.S. 10 year Treasury
- 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.
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