Earnings season preview: Both of these will hit record highs

With few places to hide from rising prices and interest rates, and facing tough comparisons a year ago, Wall Street generally expects earnings for the earnings season of the second quarter are as weak as they were at the end of pandemic-stressed 2020.[againstchallengingyear-agocomparisonsWallStreetgenerallyexpectsgainsfortheQ2earningsseasontobeasweakastheywereattheendofpandemic-stressed2020[againstchallengingyear-agocomparisonsWallStreetgenerallyexpectsgainsfortheQ2earningsseasontobeasweakastheywereattheendofpandemic-stressed2020


Yet even as gasoline and groceries become more expensive for consumers, dividends and other payouts to investors are expected to remain at record highs. And, while growth has likely slowed, profit margins are expected to be among the highest since at least 2008.

The earnings season comes after the economy continued to add more jobs than expected last month. Additionally, many executives were optimistic about demand trends. Now Wall Street’s attention will shift to what they see in the future.

Delta Airlines (DAL) kicks off the second-quarter earnings season on Wednesday morning, with results expected from JP Morgan (JPM) and other banks later in the week. Delta’s earnings will give investors clues to the state of post-lockdown revenge spending – crazy travel spending aimed at making up for lost time. Bank results, meanwhile, will provide insight into lending, transactions and the broader economy.

But it could take a few more months for consumer concerns to be more reflected in the results of S&P 500 companies.

“We may have to wait until third-quarter earnings season to find out if businesses and demand are responding to Fed tightening,” said Sheraz Mian, director of research at Zacks. “Finally, it must.”

“There is some moderation in the economy and in spending, and we may see some of that this earnings season,” he continued. “We haven’t seen much of that so far.”

Q2 Earnings Season: Energy Weighs

In total, analysts expect S&P earnings to rise 4.3% year-over-year in the second quarter, according to The FactSet survey released on Friday. However, he noted that the actual results tend to be higher.

Nonetheless, growth of 4.3% would mark a slowdown from the 9.2% gains recorded in the first quarter. And that would represent the weakest growth rate since the 4% gain recorded in the fourth quarter of 2020.

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Either way, the energy industry will do the heavy lifting for the second-quarter earnings season, after Russia’s invasion of Ukraine sent oil prices soaring. Excluding the energy sector, FactSet expects earnings for the broader S&P 500 to fall 4.1%.

Yet the 2020-level pessimism lies elsewhere. Analysts cut their overall estimates for second-quarter earnings per share by 1.2% between March 31 and June 30, FactSet said. The downward revisions were the largest since the second quarter of 2020.

Margin strength in Q2

However, price increases will still play an important role in boosting sales. Revenues for S&P 500 companies are expected to rise 10.1% for the quarter, FactSet said. This is a slightly more optimistic forecast than in March.

Forecasts predict that net profit margins for S&P 500 companies will reach 12.4%. That’s slightly higher than the previous quarter, and even above the five-year average of 11.1%, FactSet said.

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If margins meet FactSet’s target, the report says, “it will tie the mark (with Q4 2021) for the fourth-highest net profit margin reported by the index since FactSet began tracking this metric in 2008″.

However, this figure has been modified downwards in the last three months. And that’s down from 13% a year ago, John Butters, senior earnings analyst at FactSet, said by email.

“Net profit margins reached record highs in early 2021 due to a combination of rising profits and easy comparison with lower net profit margins in early 2020 due to COVID lockdowns,” a- he declared.

Q2 Earnings Season: The Backdrop

As a preface to the second-quarter earnings season, the economy posted stronger-than-expected job gains last month – 372,000, compared to 270,000 expected by Wall Street. But the jobs numbers are unlikely to change expectations for a more aggressive 75 basis point rate hike from the Federal Reserve later this month.

The Fed raises interest rates in an effort to temper rising prices. Consumer demand has rebounded since 2020. But that demand, aided by trillions in stimulus aid and a hefty pile of quarantined consumer savings, has come up against a world of distorted supply chains. Shipping, energy and labor costs jumped.

Since then, Russia’s invasion of Ukraine, supply difficulties, difficulties in attracting labor and China’s continued Covid restrictions have driven up costs, delayed deliveries of products and complicated planning. Core inflation pressure eased somewhat in May, but consumer spending was weaker than expected. That stoked analysts’ fears about consumers’ ability to afford higher prices.

Second quarter results, June jobs

Mian said he expects strong results from airlines, which have so far benefited from a rebound in travel demand. Many airlines said they were more optimistic about demand in the second quarter.

But elsewhere, weakness looks likely to emerge in financials, where the Federal Reserve’s aggressive rate hikes and fears of a slowdown have dampened the housing market, IPOs and mergers and acquisitions. Recession concerns could also weigh on tech as customers become more wary of longer-term contracts.

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FactSet also noted that Amazon (AMZN) and Target (TGT) have been the “biggest contributors” to lower expected second-quarter earnings in the consumer discretionary sector since March 31.

Shares of Amazon fell sharply in April after the e-commerce giant announced a loss and gave a weak sales forecast, following explosive gains during the pandemic. Target, meanwhile, dived amid concerns about its ability to manage inventory and costs.

Quarterly payments

Meanwhile, companies largely continued to increase payouts to investors in the second quarter.

Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said last week that U.S. ordinary dividend increases were $19.3 billion in the second quarter, up about 25% from compared to a year ago. Decent cash flow contributed to these increases.

Still, the dividend payout ratio remained historically low, Silverblatt noted, as companies continued to favor share buybacks as a way to return value to shareholders. Redemptions during the second quarter also look set to hit another record after hitting one in the first quarter.

Payouts and share buybacks are expected to remain high as companies attempt to boost earnings per share. Companies could further increase their dividends as they try to compete with other investments focused on rising rates.

“As inflation rises, they need to up their game,” Silverblatt said.


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