PRIMER: US corporate earnings season will get underway this week; analysts see downgrades to forward estimates

Major earnings in the week of 11-15th July include: 

• Tuesday: PEP.


• Thursday: JPM, MS.


• Friday: UNH, BLK, WFC, C.

Weekly earnings estimates note can be accessed here. 

CORPORATE EARNINGS SEASON PREVIEW:

• The consensus expects earnings growth to rise 5.6% in Q2, according to Refinitiv, and revenues are seen rising 10.4%. Taking the energy sector out of the equation, earnings growth is seen -2.4% in Q2, while revenue growth is estimated to rise 6.7%. Heading into Q2 reporting, Refinitiv notes that there have been 77 negative preannouncements by S&P 500 companies, and 45 positive preannouncements. Major banks will begin publishing their latest earnings reports next week.


• Many analysts have suggested that earnings will take over from valuations as the key driver for equities given that rates and equity risk premiums are now discounting a slowdown in growth. Morgan Stanley notes that S&P equity risk premium has been rising recently, and currently sits at around 340bps, close to its fair value level of 370bps. “This is a necessary condition for a more durable low in equity prices, but until earnings estimates are cut to more reasonable levels or valuations reflect that risk, the bear market is not complete,” the bank writes, and expects Q2 earnings to be a “good start in that regard.”


• MS says S&P 500 and Nasdaq 100 forward earnings estimates are both over 20% above the post-GFC trend, while it cites several leading signals pointing to forward earnings expectations decelerating in the coming months from these elevated levels, and “importantly, earnings revisions breadth, which often leads forward dollar EPS, is in negative territory and has decelerated further in the last few days/weeks.”


• MS’ analysis finds that defensive industries – like Telecoms, Utilities, Insurance, Real Estate, some Staples, Healthcare – screen relatively well when assessed on that basis, while cyclical tech groups – like Tech Hardware, Semis – have a higher risk on that basis. The bank adds that several consumer-oriented groups – like Food & Staples Retailing, Consumer Services, Consumer Durables and Apparel, Transports – screen as being more at risk.


• “Given the increasing risk to growth, the market is rewarding earnings stability,” MS writes, “we measure earnings stability by looking at companies’ earnings estimate dispersion, ROE volatility, and sales growth volatility, and companies with stable earnings tend to have lower estimate dispersion, lower ROE volatility, and lower sales growth volatility.” MS continues to think this factor can outperform in an uncertain macro environment.


• Meanwhile, analysts at Goldman Sachs note that the consensus view of 5.6% Y/Y earnings growth is a low bar that firms will likely clear, but expects cautious commentary to prompt cuts to forward estimates. "In our baseline, assuming the economy avoids recession, we forecast EPS growth of +8% in 2022 and +6% in 2023 and a rise in the S&P 500 index to 4300," adding that "in a moderate recession, our model implies 2023 EPS would fall by 11% to USD 200 (vs. current consensus of USD 250)," and "assuming consensus EPS estimates move halfway (to USD 225) by year-end, a 14x P/E would bring the S&P 500 to 3150."

11 Jul 2022 - 10:30- EquitiesResearch Sheet- Source: Newsquawk