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Perspectives

The Roller Coaster Ride In Both Directions Continues

by Fortem Financial October 10, 2022

Equities closed higher (S&P 500 +1.6%) in a roller-coaster week, snapping a three-week losing streak. Stocks bounced early in the week on oversold conditions and negative sentiment. There was also a renewed pickup in policy pivot hopes. The week ended with a stronger than hoped for employment report selloff. Best sector was energy (+13.9%); worst sectors were REITS (-4.1%) and utilities (-2.6%).

Market updates

3Q Earnings Season To Kick Off Later This Week With The Banks

With the banks expected to report later this week, the third quarter earnings season will officially get underway. As it stands now, the S&P 500 is expected to see earnings growth of 4.1% during the quarter with the energy sector expected to lead the way once again. Excluding the energy sector, S&P earnings are estimated to be down -2.6%.

S&P 500 3Q 2022 Expected EPS Growth Rates (Source: Refinitiv)

Sales Growth Expected To Outpace Earnings Growth

Sales growth for the S&P 500 during the 3rd quarter is expected to be 9.7% and similar to earnings, the energy sector is expected to provide an outsized contribution. However, unlike energy, sales growth is still expected to be positive at 6.4% ex. energy. One item that is worth noting is that all but two sectors (energy and industrials) have earnings growth that is slower than sales growth.

S&P 500 3Q 2022 Expected EPS Growth Rates (Source: Refinitiv)

Operating Margins Continue To Slowly Drift Lower

We continue to believe that operating margins have peaked and will likely continue to move lower especially if the economy heads towards a recession. What’s causing margins to move in a slow decline rather than a sharp drop is the support the energy sector has provided. Over the last 40 years, margins have been mean reverting even if in an uptrend and we expect this time to be no different.

Estimated Next 12-Month S&P 500 Operating Margin

Three Energy Companies In The Top 10 by S&P 500 Earnings Contributors For 2Q

One notable observation about the large contributors to the S&P 500 from an earnings standpoint is the differential between the market cap of energy companies and the amount they contributed during the second quarter. While one could argue the volatility associated with commodity prices doesn’t warrant an equal contribution of market cap to earnings for companies in the sector, if each of the companies’ weights were to double, they would still not even be half of their earnings contributions.

Top 10 S&P 500 Issues By Earnings Contribution

Source: Bob Doll Crossmark Investments, 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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Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

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The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
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Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

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