Welcome to RBC’s Markets in Motion podcast, recorded August 3rd, 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 takeaways on 2Q-2022 reporting season, with more than half of S&P results in. The big things you need to know: First, 2H22 and 2023 forecasts have started to come down, but perhaps not enough. Second, within the S&P 500 sector standouts so far include Energy, REITs and Utilities along with Tech. Third, Small Caps are the star of the show so far.
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Now, let’s jump into the details.
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Takeaway #1: 2H22 and 2023 forecasts for the S&P 500 have started to come down, but perhaps not enough.
- Overall, the stats for 2Q22 reporting season are strong. 76% of S&P 500 companies are beating consensus on earnings, while 66% are beating consensus on sales – off peak but well above average.
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- 2Q22 beats in percentage terms have also been really strong for both earnings and sales.
- Meanwhile, 2nd half 2022 and forecasts for both EPS and sales are coming down.
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- This is also the case for 2023 forecasts.
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- The critical question for the stock market is have they come down enough? And that’s unclear. In dollar terms the EPS revisions have been pretty small. The bottom up full year S&P 500 EPS forecast has fallen from $230 to $229 for 2022, and from $250 to $245 on 2023 based on data tracked by Bloomberg. The implied growth rates are now 8% for 2022 and 7% for 2023.
- The good news for the US equity market is that evidence of resilience continues to be seen in corporate earnings. That has helped support the short/shallow recession narrative that a lot of investors and companies, as we’ve learned through reading transcripts, are anticipating.
- The bad news for the US equity market is that the possibility of further downward earnings revisions remains an overhang for stocks as we get deeper into the 2nd half of the year.
- In June and early July a lot of the investors I spoke with said they wanted the band-aid ripped off in earnings season – they wanted guidance and sell-side forecasts to get cut and bake in the economic slowdown so they could have some confidence about where multiples were. And that’s just not the story here.
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- Admittedly, we can get a bit more excited about where we are on earnings by looking at the rate of upward revisions for the S&P 500. That stat has fallen to 32% right now – the low end of its non-crisis range and a level consistent with a 10% 12 month forward S&P 500 return. We’ll keep an eye on this indicator in the weeks and months ahead to see if it starts to turn around. But there is some precedent for it to go lower – it bottomed at 22% in Oct 02, at 10% Jan 09, and at 8% in April 2020.
- We suspect we won’t know if the damage on this indicator is enough until we get into the next reporting season.
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Moving on to takeaway #2: within the S&P 500 sector standouts so far include Energy, REITs, and Utilities along with Technology.
- Energy, REITs, and Utilities are standing out as pockets of earnings resilience.
- These three sectors are the ones doing the bulk of the heavy lifting in terms of propping up 2022 growth estimates – they are the three where we’ve seen full year 2022 growth rates estimates move up since the beginning of July.
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- All three are also bucking the trend on 3Q22 estimates, staying flat or going up over the past month.
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- These three sectors are also the only ones that are in positive territory on the rate of upward revisions for both EPS and sales.
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- And Energy is also the top sector on revenue beats.
- Tech is more complicated.
- It’s actually been the top sector in the S&P 500 when we look at the percent of companies beating consensus on EPS.
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- But earnings sentiment for this sector has already been deeply negative if you look at the rate of upward revisions – it’s been one of the worst sectors on that metric and the rate of upward EPS estimate revisions for Tech is also near historical lows, something we’re seeing for the growth sectors generally like Comm and CD.
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- Within Tech, groups like Semis and Comm Equipment are near the low end of their range on revisions. If there are any areas of the stock market where the earnings bandaid has been ripped off, these are the best candidates.
- So there’s a combination of deep pessimism coming in, results that have been better than feared, that’s helping the Tech sector right now.
- What does this all mean for positioning? Last month we upgraded Energy to OW, REITs to MW, and reiterated our Tech OW and what we’re seeing so far in reporting season adds to our confidence in all of those calls.
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We’ll wrap up with takeaway #3: Small Caps are the star of the show so far.
- As we were updating our numbers, I was really surprised to see that Small Caps were really shining on a couple of metrics.
- If you look at the percent of companies beating consensus expectations – the Russell 2000 is hitting a new high on revenues (71%) and approaching past highs on EPS (74%). That’s a stark contrast with Large Cap where these stats on the S&P 500 are starting to retreat.
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- Additionally, the rate of upward EPS estimate revisions has been much more resilient in Small Cap than Large Cap.
- A few weeks ago, we started telling investors to go overweight Small Cap relative to Large Cap as a lot of our work is showing that recession is baked in already.
- The relative earnings strength that we are seeing in Small Cap adds to our conviction that now is the time to get more constructive on Small Caps.
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- Some of the areas that look interesting to us within Small Cap on our earnings work are Financials and Energy – these are driving a lot of the strength in Small Cap earnings sentiment as they are showing positive revisions on both EPS and sales.
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 industry analysts.