1Q22 Earnings Preview - Transcript

Welcome to RBC’s Markets in Motion podcast, recorded April 13th, 2022. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.

Today in the podcast, our thoughts on 1Q22 reporting season, which kicks off this week in earnest with Financials. The big things you need to know: First, full-year S&P 500 EPS forecasts on the sell-side for 2022 and 2023 have moved up $5-6 since January, but underlying expectations regarding the path of profitability are likely more conservative than this stat suggests.  Second, forward looking expectations are being propped up by a few sectors including Energy and Tech. Third, our quantitative transcript review highlights the extent to which demand, inflation, price hikes, labor, the Fed, and Russia/Ukraine have been in focus in recent company commentary, and we expect these issues will remain key themes in 1Q22 earnings calls. Fourth, in our manual review of earnings call transcripts, one thing that’s really jumped out to us has been commentary on the consumer, which we think reflect a shift from goods to services spending and overall resilience.

If you’d like to hear more, here’s another five minutes. While you’re waiting, a quick reminder that you can subscribe to this podcast on Apple, Spotify and other major platforms.

Now, the details.

Takeaway #1: Underlying expectations about the path of profitability are likely more conservative than headline S&P 500 EPS forecasts imply.

  • One of the more remarkable signs of resiliency in the US equity market so far in 2022 has been the increase that’s occurred in bottom-up consensus EPS forecasts for the S&P 500. These forecasts, which are an aggregation of stock level predictions from around the Street, have moved to $230 in April from $224 in January for 2022, and to $251 in April from $246 in January. Those numbers imply EPS growth of 9% in 2022 and 10% in 2023.
  • But that’s not the full story, in our view. When we dig a little deeper, what we see is that while some modest margin expansion is baked in to those stats for 2022, in general, sell-side consensus numbers appear to be baking in a flattening of margin trends in the next two years.
  • And on margins, the buy-side seems much more pessimistic than the sell-side, with 55% saying margins are likely to contract over the next 6-12 months in our late March 2022 investor survey. While sell-side estimates can be tracked, the buy-side’s can’t be, and that’s what ultimately drives stock prices.
  • We also get the sense that expectations on the profitability outlook across the stock market as a whole are somewhat subdued when we dig into our analysis on the rate of upward EPS estimate revisions on the sell-side at the index level. For the S&P 500, this stat is still tracking at 53% for EPS as of mid April, suggesting slightly more upward than downward revisions.
  • But when we look at Small Caps, the rate of upward EPS estimate revisions for Russell 2000 companies has been in negative territory since mid March, tracking in the 42-49% range.

Takeaway #2: Forward looking expectations are being propped up by a few sectors, including Energy and Tech.

  • For example, on the 2022 EPS growth rate, expectations for Energy are the highest by a wide margin. While 2022 EPS growth forecasts are also in the double digits for Consumer Discretionary, Industrials, and Materials, most other sectors are well below 10%. Based on this exercise, we come away worried that there’s more risk to 2022 EPS forecasts for Value ex Financials than the Growth side of the market.
  • We also see evidence that some sectors are doing heavier lifting than others in our work on the rate of upward EPS estimate revisions. As of mid April only a few sectors – Energy, REITs, Materials, and Tech – have been seeing mostly upward revisions on both EPS and revenues. Most other sectors are seeing a tilt towards negative revisions on earnings alongside a positive tilt on sales revisions – suggesting that demand remains strong (with some help from pricing) but that profitability expectations have been getting reined in a bit.

Takeaway #3: Demand, inflation, price hikes, labor, the Fed, and Russia/Ukraine are likely to remain in focus.

  • We’ve continued to utilize Bloomberg’s transcript analyzer to get an objective read on the trends in some of the hot topics in company commentary in earnings calls, at conferences, and other events.
  • Characterization of underlying demand has continued to tilt positive, though a little less so than prior quarters.
  • Comments on inflation have spiked in tandem with trends in CPI.
  • Discussions around pricing have surged of late.
  • This is also the case for labor headwinds.
  • And for the Russia/Ukraine war.
  • Commentary on the Fed – which admittedly tends to be driven by Financials – has picked up to levels in line with past monetary policy milestones.
  • We expect these issues will remain key themes in 1Q22 earnings calls and that investors will be especially keen to identify any potential signs of demand erosion in particular.

Takeaway #4: In our manual review of earnings call transcripts, one thing that’s really jumped out to us has been commentary on the consumer, which has highlighted the shift from goods to services and the overall health of the consumer.

  • As has become our custom, we’ve also been reading through earnings call transcripts from the past few weeks for most S&P 500 companies and a select number of small and mid cap companies in order to get a more comprehensive picture of how the discussions on earnings calls are taking shape.
  • For the early reporters, one thing that’s really jumped out has been diverging comments on the health of the consumer. A few consumer companies tied to the goods side of retail have highlighted weakness in demand which they’ve attributed to waning consumer confidence, the Fed, interest rates, inflation and the Russia/Ukraine war.
  • But others have noted that while demand was hit early in the year due to Omicron, that the recovery coming out of the variant has been robust.
  • Other comments on the consumer that jumped out to us focused on lower than historical elasticities and the strength of wages and the labor market which are helping the consumer power through, along with the concepts of unmet demand and pent up demand for services have also been in focus in the consumer discussions.
  • Other key themes so far include elevated uncertainty due to the Fed and Russia/Ukraine, mixed messages on supply chains (some have highlighted improvements while others have highlighted ongoing challenges), the significant disruption to labor caused by Omicron (with some companies saying 8-15% of their workforce was affected!), low levels of concern about inventories, and higher inflation expectations for the year.

Our Bottom Line: Given the myriad headwinds faced by companies in the 1st quarter and the year ahead, we think 1Q reporting season has the potential to be a mess. But we also see the potential for it to not be as bad as feared, given the likelihood that buy-side expectations are much lower than official sell-side forecasts – as long as robust assessments of underlying appetite/demand remain in place. For now, we stick with our 5,050 year-end S&P 500 price target.

That’s all for now, thanks for listening, and be sure to check out our sister podcast, RBC’s Industries in Motion, for thoughts on specific sectors from RBC’s team of equity analysts.



  • Interestingly, there are a few topics where the commentary by companies has been somewhat out of sync with other data points.
    • Margins is one – company commentary has been much less constructive on margins than actual margin trends have ended up being (page 24). This is likely because there is a wide gap between Growth sectors like Tech and Communications Services and Cyclicals and Defensives on margin trends.
    • The US Dollar is another disconnect. Companies haven’t been saying much about the US Dollar recently even though the DXY has been strengthening (page 23). Normally, the US Dollar conversation picks up when the Dollar is strengthening.
    • The overall tone of companies has also been somewhat out of sync with data. Chief Executive Magazine’s monthly sentiment survey points to a worsening of CEO sentiment on the economy. But references to confidence have outstripped references to uncertainty in our transcript tracking (page 18). This may change as references to uncertainty are starting to pick up, something that normally happens when stock market volatility rises.
  • We’ve also been tracking trends in discussion around cash deployment themes.
    • Commentary regarding buybacks, dividends, and capex have all been on the rise, while discussion around M&A has flattened out. But what really jumps out to us on this analysis that discussions about debt pay down spiked in 2021 – suggesting to us that companies were getting ready for Fed lift off ahead of time by cleaning up their balance sheets.