Corporate profits

US corporate earnings, economic outlook, surprisingly optimistic

By Caroline Valetkevitch

NEW YORK (Reuters) – U.S. companies are reporting mostly upbeat news this earnings season, surprising investors who expected a gloomier outlook for both business and the economy.

Second Quarter Base Period Over Half, S&P 500 -07 -28 Corporate profits are estimated to have risen 8.1% from the year-ago quarter, compared to an estimate of 5.6% in early July, according to IBES data from Refinitiv on Tuesday.

Some 78% of earnings reports beat Wall Street expectations, above the long-term average.

Earnings growth estimates for the third and fourth quarters have fallen, but remain strongly positive. S&P 500 earnings for all of 2022 are now expected to rise 8.1% from an estimated 9.5% in July, based on Refinitiv data.

Investors feared that if high inflation and rising interest rates were about to tip the economy into recession, earnings estimates for 2022 were too high.

Increase the risk that the economy is on the verge of a recession 17, the US Commerce Department said last week that the US economy unexpectedly contracted in the second quarter – the second consecutive quarterly decline in gross domestic product.

Concerns about a possible recession had led to a sharp sell-off in stocks in the first half of the year. But the S&P 500 and Nasdaq ended July with their biggest monthly percentage gains since 2020, in part on stronger-than-expected earnings.

“The consensus was that earnings were going to crash,” said Jonathan Golub, chief US equity strategist and head of quantitative research at Credit Suisse Securities. “And it just didn’t turn out that way.”

Company reports show demand remains robust and sales are holding up, he said.

“If you want to say how healthy the economy is, that’s measured in sales,” Golub said.

Year-over-year revenue for S&P 500 companies in the quarter is expected to have risen 12.5% ​​on Tuesday, from an estimated 10.4% in early July, based on Refinitiv data.

Upbeat forecasts from heavyweights Apple and boosted investor sentiment late last week, while Chevron Corp and Exxon Mobil reported record quarterly earnings.

Apple said parts shortages were easing and iPhone demand continued, while Amazon. com forecasts an increase in third-quarter revenue.

As earnings approached, concerns were growing about how big tech and other growth names might handle higher interest rates and a possible recession, and the results so far of companies have mainly contributed to giving investors confidence in their prospects.

Alphabet’s report “dispelled some of the fears about ad spend” and other areas, said Keith Buchanan, portfolio manager at GLOBALT Investments in Atlanta.

Admittedly, the news has not been positive everywhere. Walmart shook investors early last week when it cut its earnings forecast for the full year, blaming soaring food and fuel prices.

This has raised concerns about consumer health and the outlook for other retailers, most of which have yet to report results for the latest quarter.

Additionally, analysts have cut their third-quarter earnings growth estimates more than usual from “either before the pandemic or over the past two years,” wrote Nicholas Colas, co-founder of DataTrek Research. , in a note this week.

Holding earnings forecasts is essential for valuations. The S&P 500’s 12-month price-to-earnings ratio, at 17.5 on Tuesday, is down from 22.1 at the end of December, but still above the long-term average of around 16, according to Refinitiv data.

S&P 500 earnings growth for 2022 and 2023 –

Other strategists said the season follows a normal pattern: companies are often more negative than positive with their outlook, so earnings forecasts for the coming quarters tend to fall generally during a period of report.

So far, the negative outlook for S&P 500 companies for the third quarter is only marginally higher than the positive outlook, based on data from Refinitiv.

“So far, what has happened is no worse than feared. And the market was already braced for bad news,” said Keith Lerner, chief market strategist at Truist Advisory. Services in Atlanta.

(Reporting by Caroline Valetkevitch; Editing by Alden Bentley and Nick Zieminski)