Q1 Earnings Season Runs into Rate Fears

First quarter earnings season is in full swing, and as we’ve seen in prior quarters, analysts have been too conservative with their initial estimates. Much of last week, however, investors fretted over how quickly the Fed might raise interest rates.

Let’s take a quick look at the profit numbers.

With 20% of S&P 500 companies having reported Q1 earnings through April 22, S&P 500 profits are forecast to rise a respectable 7.3% versus one year ago, according to Refinitiv. As of April 1, the projection for Q1 was 6.4%.

So far, 78% of the S&P 500 companies that have reported have topped profit expectations. In other words, profits exceeded the consensus (mean) profit forecast issued by analysts.

It’s not unusual for most companies to top analyst profit expectations, according to FactSet, and we typically see earnings projections rise as the reporting season unfolds.

According to FactSet, the earnings growth rate has increased by an average of 5.5 percentage points over the past ten years (from the start of earnings season to its conclusion) due to the number and magnitude of positive earnings surprises.

If that trend continues, Q1 earnings projections could top 10%. But this is simply an estimate. As we know, past trends do not guarantee future results. But the early results are encouraging.

What’s helping fuel earnings growth? The biggest contributor is an expanding economy. Firms in the S&P 500 are made up of large publicly traded companies. For many, the biggest influence on sales is economic activity. Today, the economy is expanding, and it is being reflected in earnings growth.

But in today’s inflationary environment, investors are also looking at profit margins. How firms are managing rising costs and their ability to pass along higher costs are under the microscope.

The Q1 2022 S&P 500 profit margin is forecast to decline from Q4 2021, but it is expected to land at a historically high level.

Why are profits important? They have a big influence on the direction of stock prices. Today, there is what might be called a ‘tug of war’ going on between the tailwind from higher earnings and the stiff headwind from rising interest rates. We saw that reflected in last week’s volatility.