What To Expect From Q1 2022 Earnings Season Bearing in Mind Monetary Tightening

The Q1 earnings season is due to start this week with the U.S. banks reporting how they performed during the period.

Earnings surprises were still quite widespread during the previous earnings season. In Q1/2022, the 10 companies with the highest market cap came out with EPS earnings surprises ranging from +2.68% for Taiwan Semiconductor Manufacturing Company (TSM) to +58.04% for Amazon.com (AMZN). Only Meta Platforms, former Facebook (FB) posted a negative earnings surprise of -4.43%. Also, 9 out of 10 companies reported higher than expected revenues.

According to FactSet, the expected earnings growth rate for the S&P 500 is 4.7%. If secured, it will be the lowest earnings growth rate S&P 500 had recorded since Q4 2020, when it reported an earnings growth rate of just 3.8%. Also, FactSet reported that some 67 S&P 500 companies have released downward EPS outlooks for Q1 2022, while 29 S&P 500 companies have issued upbeat EPS forecasts.

New estimates are downgraded from the previous Q1 2022 earnings growth rate forecast of 5.7%, published on December 31. Due to the downward revision, 7 sectors are now estimated to report weaker earnings than the December 31 estimates.

Currently, the forward 12-month P/E ratio for the broad market index stands at 19.5, compared to the 5-year average P/E ratio of 18.6 and 10-year average of 16.8. It means stocks are in general quite expensive, but not by much. 12 S&P 500 have reported better-than-expected Q1 2022 earnings results, while 14 S&P 500 companies have generated better-than-expected revenue in the quarter.

In a year-ago period, the earnings growth of S&P 500 components was fueled mainly by the financial companies. But the sector represented just 11% of the total Market Cap of the S&P 500 index. However, now many expect the financials could contribute as much as 25% of the earnings growth for the benchmark index - not least because of broad anticipation of the Fed’s further rate hikes down the road. Monetary tightening would bolster banks' profits, on one hand, but risk curbing economic growth, on the other.