With few places to hide from rising prices and rising interest rates, and running up against challenging year-ago comparisons, Wall Street generally expects gains for the Q2 earnings season to be as weak as they were at the end of pandemic-stressed 2020.
Still, even as gas and groceries get more expensive for consumers, dividends and other investor payouts are likely to stay at record levels. And, while growth is likely to have slowed, profit margins are set to be among the highest since at least 2008.
The earnings season arrives after the economy continued to add more jobs than expected last month. Also, many executives have been bullish on demand trends. Now, Wall Street's attention will shift toward what they're seeing up ahead.
Delta Air Lines kicks off the Q2 earnings season on Wednesday morning, with results due from JPMorgan and other banks later in the week. Earnings from Delta will give investors clues into the state of post-lockdown revenge spending — travel outlays aimed at making up for lost time. Bank results, meanwhile, will provide a look at lending, deal making and the broader economy.
But it could take a few more months for consumers' anxieties to reflect more prominently in S&P 500 companies' results.
"It's possible that we may have to wait until the Q3 earnings season to get proper clarity as to whether businesses, and demand, are responding to the Fed tightening," said Sheraz Mian, director of research at Zacks. "Eventually, it has to."
"There is some moderation in the economy and in spending, and it's possible that we'll see some of that this earnings season," he continued. "We haven't seen a whole lot of that thus far."
Q2 Earnings Season: Energy Weighs In
In total, analysts expect earnings for S&P companies to grow 4.3% year-over-year for the second quarter, according to FactSet survey released Friday. However, it noted that actual results tend to come in higher.
Still, 4.3% growth would mark a slowdown from the 9.2% gains put up during the first quarter. And it would represent the weakest growth rate since the 4% gain notched during the fourth-quarter of 2020.
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Either way, the energy industry will be doing the heavy lifting for the Q2 earnings season, after Russia's invasion of Ukraine caused a spike in oil prices. Factoring out the energy industry, FactSet expects earnings across the S&P 500 to fall 4.1%.
Still, 2020-level pessimism resides elsewhere. Analysts cut their overall Q2 earnings-per-share estimates by 1.2% between March 31 to June 30, FactSet said. The downward revisions were the biggest since the second quarter of 2020.
Q2 Margin Strength
However, price increases will nonetheless play a big role in boosting sales. Revenue for S&P 500 companies is expected to grow 10.1% for the quarter, FactSet said. That's a slightly more upbeat forecast than during March.
Forecasts call for net profit margins among S&P 500 companies to hit 12.4%. That's slightly higher than the prior quarter, and above even the five-year average of 11.1%, FactSet said.
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If margins hit the FactSet target, the report said, "it will tie the mark (with Q4 2021) for the fourth-highest net profit margin reported by the index since FactSet began tracking this metric in 2008."
However, that figure has been tweaked downward over the past three months. And it is below the 13% reached a year ago, John Butters, senior earnings analyst at FactSet, said via email.
"Net profit margins rose to record-high levels in early 2021 due to a combination of rising earnings and an easy comparison to weaker net profit margins in early 2020 due to the COVID lockdowns," he said.
Q2 Earnings Season: The Backdrop
As a preface to the Q2 earnings season, the economy put up stronger-than-expected job gains last month — 372,000, compared to the 270,000 expected by Wall Street. But the job figures probably won't change expectations for a more aggressive, 75-basis-point rate hike from the Federal Reserve later this month.
The Fed is raising interest rates in an effort to temper rising prices. Consumer demand has rebounded since 2020. But that demand, aided by trillions in stimulus aid and a big pile of consumer savings under quarantine, ran up against a world of warped supply chains. Shipping, energy and labor costs jumped.
Since then, Russia's invasion of Ukraine, difficulties securing supplies, difficulties attracting labor and China's continued Covid restrictions have pushed costs higher, delayed product deliveries and complicated planning. Core inflation pressure eased somewhat in May, but consumer spending was weaker than expected. That fanned analysts fears about consumers' ability to stomach higher prices.
Q2 Earnings, June Jobs
Mian said he expected strong results from the airlines, which have benefited so far from a rebound in travel demand. Many airlines said they were more upbeat about demand through the second quarter.
But weakness elsewhere seems likely to emerge in finance, where the Federal Reserve's aggressive rate hikes and worries of a downturn have cooled off the housing market, IPOs and mergers and acquisitions. Recession concerns could also weigh on tech, as customers grow more wary about longer-term contracts.
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FactSet also noted that Amazon and Target were the "largest contributors" to the drop in expected Q2 earnings in the consumer discretionary sector since March 31.
Shares of Amazon fell hard in April, after the e-commerce giant reported a loss and gave a weak sales forecast, after explosive gains during the pandemic. Target, meanwhile, plunged amid concerns about its ability to manage its inventories and costs.
Quarterly Payouts
Meanwhile, companies largely continued to increase payouts to investors during the second quarter.
Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said last week that U.S. common dividend increases came in at $19.3 billion during the second quarter, up around 25% from a year ago. Decent cash flow helped those increases.
Still, the dividend payout ration remained historically low, Silverblatt noted, as companies continued to prefer share buybacks as a means of returning value to shareholders. Buybacks during Q2 also appear set to hit another record after chalking one up in the first quarter.
Payouts and stock buybacks are likely to remain elevated as companies try to ratchet earnings per share higher. Companies could still raise their dividends as they try to compete with other investments geared toward rising rates.
"As inflation goes up, they need to up their game," Silverblatt said.
