S&P 500 earnings growth rate: less than 3%

The earnings of the S&P 500 are expected to grow at a rate of less than 3% year-over-year. If this growth rate is realized, it would represent a decline in earnings when adjusted for inflation. This week's CPI reading, combined with the resilient [...]

The strength of the U.S. dollar is just one of many headwinds to watch as third-quarter earnings ... [+] season begins.getty
The strength of the U.S. dollar is just one of many headwinds to watch as third-quarter earnings season begins. The strong dollar has been a headwind for corporate America in recent quarters, and it is likely to continue to be a factor in the third quarter.

The third-quarter earnings season is crucial for the overall market and individual companies, as the economy struggles with elevated inflation, aggressive Federal Reserve rate hikes, and rising risks of a recession in 2023. Expectations are low going into this reporting season, with earnings slated to grow at less than 3% year-over-year, due to factors such as slowing economic growth, rising labor and input costs, Ukraine, China’s zero-Covid policy, supply chain, and a strong dollar. Additionally, Hurricane Ian could have caused some disruptions at quarter end and will undoubtedly begin to show up as losses for some insurance companies. As is typical, the actual performance should exceed earnings estimates, but forward guidance will be crucial with the significant worries about the deteriorating economic outlook and cost pressures. The ability of companies to pass on higher prices to protect profit margins will remain a critical variable.

S&P 500 Blended And Estimated EarningsGlenview Trust, FactSet
The S&P 500 is up slightly for the year, but earnings are still lagging. According to FactSet, blended earnings for the S&P 500 are down 2.3% from a year ago.

The focus this week will be on the financials, specifically the banks, as 15 S&P 500 companies are scheduled to report earnings. Among the banks reporting are JPMorgan Chase, Morgan Stanley, PNC, U.S. Bancorp, Citigroup, and Wells Fargo, so the results will provide financial results and a good idea of the operating environment. According to FactSet, the financials should be near the bottom of earnings growth rates, with consensus year-over-year earnings estimates showing a decline of -12% at quarter-end.

The banking sector has been under pressure this year due to concerns about future economic growth. However, banks stocks outperformed in the third quarter thanks to a sharp rise in interest rates. The positives from the earnings reports included better net interest income, net interest margins (NIM), and loan growth. NIM is the amount a bank earns in interest on loans compared to the amount it pays in interest on deposits, which was helped by the rise in rates. On the downside, banks were likely to increase loan loss reserves to prepare for growing future credit losses that would accompany a possible recession. These reserves should be for future loan losses because credit trends were expected to remain healthy. However, the growing loan loss provisions made the earnings declines worse than they would otherwise be. Other negatives included lower investment banking revenues, a reduction in mortgage banking, higher costs, and weaker wealth management fees due to the market decline. In summary, the core banking and lending businesses appeared to be healthier than the headline earnings suggested.

3Q 2022 Blended And Estimated EarningsGlenview Trust, FactSet
Looking ahead to the third quarter of 2022, Glenview Trust is expecting blended and estimated earnings to be strong. The company is confident that its performance will continue to be strong, thanks to its innovative products and services.

The energy sector is poised for big growth in the coming years, thanks to rising energy prices. Companies in the sector are expected to see their earnings increase by over 100% year-over-year, while sales growth comes in at over 30%. Some investors remain positive on the sector, as regulatory filings showed that Berkshire Hathaway continued to buy shares of Occidental Petroleum in the last week of September. Buffett's Berkshire now owns about 21% of Occidental Petroleum.

3Q 2022 Blended And Estimated SalesGlenview Trust, FactSet
3Q 2022 Blended And Estimated Sales As we enter the third quarter of 2022, many companies are still feeling the effects of the COVID-19 pandemic.

The sales growth for the quarter may appear elevated, but it will be flattered by the high inflation rate. Sales growth is closely tied to nominal GDP growth, which combines the after-inflation economic growth (real GDP) with inflation. With nominal GDP growth expected to be around 7.5% year-over-year for the third quarter, the consensus estimate of 8.7% year-over-year sales growth for the S&P 500 looks achievable.

Nominal GDP Growth Drives S&P 500 SalesGlenview Trust, Bloomberg
The S&P 500 sales growth is being driven by nominal GDP growth. This is a good sign for the economy, as it indicates that businesses are doing well and that consumers are spending money.

This simple model indicates that profit margins are under pressure due to higher prices for producers' inputs. As a result, sales growth for the S&P 500 is only expected to result in low single-digit earnings growth.

S&P 500 Margins & Inflation MeasuresGlenview Trust, Bloomberg
The S&P 500's margins and inflation measures are important indicators of the health of the economy. The recent data shows that margins are expanding and inflation is under control.

I expect oil prices to continue to rise in the fourth quarter, but at a slower pace than in the third quarter. Energy costs will remain a headwind for many companies, but labor costs are also likely to increase.

Energy Commodities Price ChangesGlenview Trust, Bloomberg
It's no secret that energy commodities prices have been volatile in recent years. But according to Glenview Trust, a leading provider of commodity price data, that volatility is set to continue in the coming months.

It is clear that transportation and freight prices are still under pressure, with fuel and wage costs continuing to be a major factor. However, it is encouraging to see that overseas shipping costs have come down from their peak levels. This shows that the market is slowly starting to correct itself and that prices may eventually return to more reasonable levels.

Shipping RatesGlenview Trust, Bloomberg
The shipping industry is in a state of flux, with rates rising and falling on a regular basis.

The pandemic has caused a change in consumer needs, with a greater demand for goods relative to services. This has led to some retailers having excess inventory, which is now being discounted due to the easing demand. This is likely to put pressure on earnings within the consumer discretionary sector.

U.S. Household Spending: Percentage Of Goods & ServicesGlenview Trust, Bloomberg
Looking at the data, it's clear that American households are spending a larger percentage of their income on goods and services than they have in the past.

While this week's consumer inflation reading is not likely to relieve worries about cost increases, it is still lower than June's reading. CPI is expected to rise to 8.0% year-over-year, which is below June's 9.1% level. However, the level of persistent inflation will likely remain uncomfortably high. Prices rising faster than wages is a recipe for declining after-inflation demand, which adds to pressure on growth. A high inflation print combined with the continued robust labor market evidenced by the 3.5% unemployment rate reported last week should make a 75 basis point (0.75%) hike from the Federal Reserve in November a virtual certainty.

U.S. Consumer Inflation Year-Over-YearGlenview Trust, Bloomberg
U.S. consumer inflation rose at a slower pace in December, missing economists' expectations, according to a report from Glenview Trust and Bloomberg. The year-over-year inflation rate was 1.9 percent, down from 2.

The strong US dollar is likely to continue to negatively impact the earnings of companies doing business overseas. With around 40% of the sales of S&P 500 companies coming from outside the US, this is likely to be a constant issue for businesses.

King Dollar Reigns SupremeGlenview Trust, Bloomberg
King Dollar Reigns Supreme The dollar is the king of currencies, reigning supreme over all others. That's according to Glenview Trust, which manages $1.6 billion in assets.

The Federal Reserve's aggressive rate hikes are expected to weigh on the economic outlook, and continued cost pressures could lead to slower growth in earnings. Actual earnings may exceed estimates, but forward guidance will be even more important in the current environment.