Lessons from the Q1 earnings season

The first quarter results confirmed some of our positions. Several sectors withstood the new inflationary regime better than expected.

PROFIT GROWTH STAYS WITHIN US

90% of US companies have now released their first-quarter results, with 79% reporting earnings per share that beat analysts’ forecasts. As shown in Table 1, these companies posted year-over-year growth of 9.32%, 5.14% more than forecast. In terms of earnings, the energy, materials and industrials sectors posted the strongest gains. In the energy sector, part of this spectacular performance is based on a base effect as the sector continues to recover from the COVID-19 pandemic. On the other hand, energy prices rose sharply in the second half of 2021, ahead of the acceleration triggered by Russia’s invasion of Ukraine. The healthcare sector confirmed our decision to favor defensive quality companies in an environment characterized by higher inflation and volatility. Helped by a significant surprise rate, this sector posted 16.15% earnings growth in the first quarter. In contrast, US consumer discretionary results were weighed down by lower-than-expected earnings from Amazon. Consumer Staples has so far weathered inflation fears by posting better-than-expected earnings per share (EPS). In fact, US consumption remains resilient and companies with strong brands like Coca-Cola or Pepsico have managed to pass rising costs on to consumers. Financials underperformed last year on rising costs, but earnings still beat expectations. Finally, the technology sector presented mixed results, with software developers performing in line with expectations while semiconductor manufacturers remained strong despite ongoing supply chain issues.

A CORRESPONDING ROBUST SEASON IN EUROPE

While two-thirds of European companies released their first quarter results, 72% of them beat earnings per share estimates. Collectively, these companies posted year-over-year growth of 12.73%, 12.84% higher than forecast. The balance sheet is similar to that of the US: solid results in value sectors such as energy, materials and industrials, strong progress in healthcare and good resilience in consumer staples. Although European banks reported lower earnings per share than a year earlier, they managed to beat analysts’ forecasts.

IS THE ENERGY SECTOR THE TREE THAT COVERS THE FOREST?

Financial markets were rocked by rising inflation, interest rates and volatility. However, US and European companies have managed to rely on strong pricing power and the resilience of the labor market. Analysts have therefore revised upwards their full-year earnings per share forecasts in most regions. They now expect earnings growth of 10.5% and 11.9% for the S&P 500 and STOXX 600, respectively, in 2022, compared to 8.7% and 8.2% at the start of the year. However, this strong growth masks significant differences between sectors. Analysts have raised their 2022 earnings estimates for the energy sector by more than 60%. Materials (+12%) also benefited to a lesser extent from the increase in commodity prices. Elsewhere, forecasts changed little, however, as earnings estimates for consumer discretionary were cut by around 5%. For the S&P 500 index ex-energy, earnings growth forecasts for 2022 are stable year-to-date.

PROFIT MARGINS AT RISK

Profit margins peaking in both Europe and the United States are sending out an additional alarm signal. While some sectors are protected by strong pricing power, profit margins are threatened by rising wages, rising interest rates and ongoing supply chain problems. The combination of flat non-energy earnings forecasts and risks weighing on profit margins confirms our preference for the Value and Quality/Defensive sectors over growth and cyclical stocks.

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