Resilient earnings have been a pleasant surprise so far

With the first full week of the US third quarter earnings’ releases behind us, results so far have generally been a pleasant surprise. This comes against a backdrop of bleak expectations, with many analysts expecting dire misses and lower guidance that have not materialised, except for a few misses here and there. In actual fact, this resembles very much what we witnessed in the June-quarter reporting cycle, when estimates and sentiment had weakened so much that the actual results ended up looking a lot better in comparison.

That said, it is important to point out that the sample of results at this stage was skewed towards some of Wall Street’s biggest banks, whose profitability benefitted from higher interest rates and trading in volatile bond and currency markets. Bank of America really stood out on that count, but practically all of the banks came out with strong numbers for the third quarter and provided reassuring commentary for the current quarter as well.

Beyond the financial sector, there were also good results from US-based airlines like United Airlines, Delta and American Airlines, which suggest that the airline industry is recovering to pre-pandemic levels. The industry is getting a boost from a strong dollar, which is making many international destinations more affordable.  

Players in the beverage and food industry also performed well, with companies such as PepsiCo and General Mills all showing strength. We should keep in mind that these operators in the consumer-facing segment have been able to pass on the higher cost of inputs, labour, and logistics thus far. However, we can intuitively appreciate that this trend cannot go on forever, particularly when considering that the savings rate in the US is already running below the long-term average.

We saw some evidence of this in the report for Procter & Gamble, whose organic sales were up in the third quarter on the back of price increases, but management indicated that they have reached the limit in how much they could raise prices going forward. The headwinds from rising costs have been with us for a while, as has been the issue of foreign exchange translation, but the US dollar’s record strength this year has become a much bigger hurdle for companies. In fact, Procter & Gamble was forced to trim its guidance solely on foreign exchange grounds.

Beyond these segments of the overall economy, this week will bring another large wave of earnings results, with mega cap technology companies taking centre stage. Market giants such as Microsoft, Alphabet, Meta Platforms, Apple and Amazon.com are all slated to report in the coming days. These companies have seen their share prices down 20 per cent to 30 per cent year-to-date. It’s likely too late to salvage gains for calendar 2022 for any of these FAANG equities, and it remains to be seen if third quarter results will provide the remedy for corporate profits going forward or if there will be something to look forward to in their guidance. In any case, these companies’ equities are still very widely owned, and any earnings disappointments from their end could quickly turn the market south again in view of their immense influence on market indices.

A big part of this year’s growth has come about thanks to the strong momentum in the energy sector, whose earnings are on track to more than double this year. Excluding this extraordinary energy sector contribution, earnings growth for the rest of the S&P 500 index would be down 0.3 per cent. This relatively flat earnings’ picture for this year is also in line with the economic ground reality.

Earnings next year are expected to be up 5.6 per cent as a whole and 7.2 per cent when excluding the energy sector. This magnitude of growth can hardly be called out-of-synch with a flat or even modestly down economic growth. This is because headline GDP growth numbers are in real or inflation-adjusted terms, while S&P 500 earnings are not.

Disclaimer: This article is brought to you by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is published by Calamatta Cuschieri Investment Services Ltd, which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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