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Q2 Earnings Season Starts this week….What to expect

by Fortem Financial July 11, 2022

Watching For 2023 Downward Guidance During 2Q Reporting Season
The second quarter earnings season is set to begin this week and while earnings are expected to be up about 6%, the 2Q story is about energy holding up the aggregate data. We are more interested in guidance for the remainder of the year and into 2023. We are of the view that 2023 estimates are too high and will likely come in once analysts are given the cover from companies. For 2023, the consensus estimate is near $250, our estimate is $234.

2023 S&P 500 EPS Progression

S&P 500 Cost Growth Stabilizing
On the positive side, the growth in costs for companies have stabilized over the past five months which is welcomed news for managements and investors. This may help to slow the decline in margins we’ve seen recently. Furthermore, input costs will likely get some relief with commodities off their highs, but there still remains supply chain delays and the labor market is still strong. This time it could take longer to get some relief.

S&P 500 Y/Y Percentage Change in Costs

At The Same Time Sales Growth Is Likely Going To Decelerate On the negative side, sales growth is running above historical levels based on data going back to the early 1990s. To be fair, the elevated inflation readings are helping to make the figures look strong. However, the concern that we have is companies will not be able to sustain these strong levels. Should sales growth dip below cost growth, companies will face difficult decisions. We will be watching for additional layoff announcements which we’ve already begun to see.

S&P 500 Trailing 12-Month Sales Growth

Sector Performance When Sales Growth Is Decelerating
Looking at relative sector performance during quarters of decelerating sales growth shows that defensive sectors (Staples and Health Care) are two of the strongest performers beating the market on average by 1.2% and 1.0% respectively. Discretionary and Technology also outperformed which we suspect is the “go for growth when growth is scarce" narrative. Energy is notably the worst performer, but we are wondering if this cycle, energy is actually where the growth is.

Average S&P 500 Sector Relative Performance During Quarter of Decelerating Sales Growth

4Q 2022 Earnings Report Federal Express (FDX)
FDX was able to grow revenue by 8% y/y and maintain margins in the high inflationary environment. They increased operating income by 7% y/y. Note the Capital Expenditures too. One of the arguments for recession is that companies will cut back on capex in anticipation of a slowing economy, which could lead to job losses, etc. FDX increased Capex 42% y/y.

2022 4Q Earnings Report Federal Express (FDX)
* The pension adjustments are due to market performance… That should stabilize over time.

Positive Developments:

  1. Slower than expected increase in labor costs in the US and ground segments. Management indicated wage rates have completely stabilized in Q4 2022.
  2. Lower delivery volumes offset by higher delivery price (+16% y/y)

Negative Developments:

  1. Jet fuel price reached $3.65/gallon in Q4 2022 (higher than expected).
  2. Household consumption is slowing down. Q4 Express delivery = 2,993 thousand units.

Source: Strategas

Market index
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.

Sincerely,

Fortem Financial
(760) 206-8500
team@fortemfin.com

 

 

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