The S&P 500 would be in an “earnings recession” without this booming sector – but that might not last long

Fears of a real recession are weighing on investors towards the end of 2022, but another type of recession is also in sight: an earnings recession.

The S&P 500 index would already be in recession if it weren’t for one top-flight sector in 2022: energy. Rising oil prices have generated huge profits for energy companies so far this year. FactSet forecasts a 118% increase in third-quarter earnings as earnings begin to rise, in line with huge first-half gains.

Overall, FactSet expects third-quarter earnings per share growth for the S&P 500 as a whole to come in at 2.4% from the year-ago period. Delta Air Lines Inc. DAL,
and large banks like JPMorgan Chase & Co. JPM,
will kick off earnings season for the quarter in the week ahead as Wall Street ponders whether companies can pivot amid higher prices, a stronger dollar, lopsided supply and signs of weakness demand.

Excluding the energy sector, the earnings estimate for the third quarter would drop to 4%. In the second quarter, earnings fell 4% excluding energy gains.

Put the two quarters together and you have a recession in non-energy earnings, or at least two quarters of declining earnings. If you include the energy sector but exclude any other individual sectors, overall S&P 500 earnings growth rates for both quarters would remain positive, said John Butters, principal earnings analyst at FactSet.

Yet even as the weather turns colder, Russia’s war in Ukraine drags on, and OPEC and its allies plan production cuts, the energy sector’s contributions to earnings growth should soon slump. fade as it comes up against tougher year-over-year comparisons.

“The fourth quarter is the last quarter where energy should really be the main driver of earnings growth,” Butters said in an interview. “Then going forward, really after the first quarter of 2023, it should be a drag on earnings instead of a positive contributor.”

The S&P 500 SPX index,
suffered a profit slump throughout 2019, after many companies’ profits soared in 2018 due to federal tax cuts. As earnings continue to grow from record highs in 2021, forecasts appear to suggest another earnings recession is brewing in 2023.

The overall estimate for earnings growth of 2.4% would be the worst since the third quarter of 2020, when pandemic shutdowns still covered much of the economy. These estimates have also dropped considerably since the summer. Three months ago, estimates for the third quarter called for 9.8% year-on-year growth, Butters said. The gap between these estimates is wider than average, and some strategists believe they haven’t come down far enough.

Still, Butters noted that historically more than 70% of S&P 500 companies have beat earnings estimates every quarter, though the magnitude of those beats has been below average this year. But he added that if recent trends continue, real earnings growth for the third quarter could reach around 6%.

As for sales, they are expected to increase by 8.5% in the S&P 500 companies in the third quarter compared to the third quarter of 2021. Margins are expected to be 12.2%, continuing to hold near the high levels of the beginning of the year, but slightly down from some of the records reached last year. However, both figures were supported by higher prices, even as higher wages squeezed margins.

Other analysts, meanwhile, have questioned whether recent results from sports equipment giant Nike Inc. NKE,
and chipmaker Micron Technology Inc. MU,
– which, respectively, were marred by aggressive curtailment plans to reduce inventories and a sharp drop in demand – hinted at the results to come. And as recession-related concerns mount, they wonder whether companies have maximized the gains they can get from their customers by charging more.

“The question now is, ‘Is pricing power out of the system? “, said Nancy Tengler, managing director of Laffer Tengler Investments. “Are companies going to be able to continue to raise prices?

This week in gains

For the coming week, 15 companies in the S&P 500, including three in the Dow Jones Industrial Average, are expected to release their quarterly results, according to a FactSet report on Friday.

Along with Delta and JPMorgan Chase, one of these components of Dow, two others – health insurer UnitedHealth Group Inc. UNH,
and Walgreens Boots Alliance Inc. WBA,
– also reports. PepsiCo. Inc.PEP,
also report during the week.

The call to put on your agenda: JPMorgan Chase

JPMorgan Chase releases its third quarter results on October 14, followed by the conference call. The bank is considered by many as an economic indicator. But with the economy in flux, investors will likely turn to CEO Jamie Dimon for his read on consumer spending and loan demand, as prices and borrowing costs rise, markets slump. are collapsing and central banks around the world are trying to fight inflation.

Dimon, in a recent Capitol Hill interrogation with other bank executives, indicated that banks have shown some resilience in the current environment.

At a conference last month, Daniel Pinto, JPMorgan’s chief operating officer, raised the possibility of “a few quarters of a shallow recession” if the Federal Reserve’s rate hike path isn’t enough to combat inflation. But for now, he said spending and the labor market remained “robust,” despite inflation, the war in Ukraine and other geopolitical tensions, and moves by the Fed to lift guards. crazy about the economy following a massive injection of pandemic-related aid. And he noted easing, albeit still high, energy prices and less pressure on the supply chain – two main reasons for the rise in prices over the past year.

“So overall it’s pretty decent, overall,” he said at the time.

The number to watch: Bank profits, forecasts

Analysts polled by FactSet expect JPMorgan to earn $2.92 per share for the quarter, down from the year-ago quarter. But revenues of $32.1 billion would be up over that period.

However, even as banks attempt to manage slowing investment banking trends and falling demand for auto and home financing amid higher interest rates, Wall analysts’ earnings outlook Street largely held their own.

Even though the Fed’s higher rates make borrowing more expensive for consumers, those rates allow banks to charge more for things like credit cards and auto loans, thereby increasing their net interest margins.

“People don’t understand, there’s always a demand for lending out there,” Dave Wagner, portfolio manager and analyst at Aptus Capital Advisors, told MarketWatch in a separate snapshot of bank earnings. “Banks can still benefit from higher average yields and excess liquidity put back to work.”

Citi analyst Keith Horowitz said Tuesday that JPMorgan has been “more disciplined than others in being patient in deploying cash,” and expects the bank to boost its net income outlook by interest, or the profit generated by lending money at a higher rate of interest. than what a bank pays out to depositors. He said bank stocks overall remained “oversold due to credit concerns.”

Elsewhere, Citigroup Inc. C,
also reports on Friday, with results potentially offering clues to the state of the financial sector internationally. Wells Fargo & Co. WFC,
and Morgan Stanley MS,
report that day as well.

Delta income also due

Delta Air Lines released its third quarter results on Thursday. Analysts polled by FactSet expect the airline to earn $1.55 a share, on revenue of $12.9 billion. The results will provide a window into whether the travel industry’s rebound still has momentum as prices rise.

William Walsh, chief executive of the International Air Transport Association, told CNBC last month that airfare prices could rise. However, Delta Chairman Glen Hauenstein at a conference last month remained optimistic about travel demand.

“We expect very, very robust demand for the holiday seasons, both Thanksgiving and Christmas,” he said. “And it looks to us now that business is going to take a very big drop, which is always great for October.”


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