US corporate earnings, economic outlook, surprisingly optimistic

A trader works at the New York Stock Exchange (NYSE) in New York City, US, June 7, 2022. REUTERS/Brendan McDermid

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NEW YORK (Reuters) – US companies have reported mostly upbeat news this earnings season, surprising investors who had been bracing for a more pessimistic outlook on both business and the economy.

Over the middle of the reporting period in the second quarter, S&P 500 corporate earnings are estimated to have increased 8.1% from the same quarter last year, compared to an estimate of 5.6% at the beginning of July, according to IBES data from Refinitiv as of Tuesday. . .

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

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Earnings growth estimates for the third and fourth quarters declined, but remained sharply positive. Full-year 2022 S&P 500 earnings are now expected to grow 8.1% versus the 9.5% estimated in July, based on Refinitiv data.

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

Adding to the risk that the economy was on the cusp of a recession, the US Commerce Department said last week that the US economy unexpectedly contracted in the second quarter – the second consecutive quarterly drop in gross domestic product. Read more

Fears of a possible recession led to a sharp sell-off in stocks in the first half of the year. But the S&P 500 (.SPX) and Nasdaq (.IXIC) ended July with the biggest monthly percentage gain since 2020, in part due to stronger-than-expected earnings.

“The consensus was that earnings would just collapse,” said Jonathan Golub, chief US equity analyst and head of quantitative research at Credit Suisse Securities. “It wasn’t done that way.”

He said the company’s reports show demand remains strong and sales are faltering.

“If you want to say, what is the health of an economy, it is measured by sales,” Golub said.

Annual revenue for the S&P 500 companies in the quarter is expected to have risen 12.5% ​​as of Tuesday, compared to the 10.4% estimated at the beginning of July, based on Refinitiv data.

Optimistic expectations from Apple and (AMZN.O) boosted investors’ mood late last week, while Chevron Corp (CVX.N) and Exxon Mobil (XOM.N) posted record quarterly revenue.

Apple said parts shortages are easing and demand for iPhones continues, while forecast a jump in third-quarter revenue.

“It held up really well, especially for the big names, but of course people were expecting the worst,” said Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey.

To be sure, the news wasn’t positive everywhere. Walmart (WMT.N) upset investors early last week when it cut its full-year earnings forecast, blaming it on rising food and fuel prices. Read more

That sparked concern about consumer health and the prospects for other retailers, most of whom have yet to report fourth-quarter results.

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

Whether earnings expectations hold up is key to valuations. Refinitiv data showed that the 12-month S&P 500 futures price-earnings ratio, at 17.5 as of Tuesday, is down from 22.1 at the end of December, but is still above the long-term average of about 16.

Other strategists said that the season follows a normal pattern: Companies are often more negative than positive with their forecasts, so earnings forecasts for the coming quarters tend to typically be lower during the reporting period.

“So far, nothing has happened worse than fear. The market has really braced for the bad news,” said Keith Lerner, chief market strategist at Truist Advisory Services in Atlanta.

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Reporting by Caroline Valitkevich. Editing by Alden Bentley and Nick Szyminski

Our Standards: Thomson Reuters Trust Principles.

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