Three “Data” items today:
Topic #1: Wall Street analysts’ S&P 500 downward earnings estimate revisions for Q1 2022. As we discussed last Sunday, the Street has been reducing its aggregate expectations for index earnings this quarter. We’re not talking big cuts, mind you … only 1.2 percent thus far. But how does that trend compare to prior quarters?
This chart, courtesy of FactSet (link to full report below) shows how much analysts have increased or decreased their current-quarter estimate through the first 2 months of the period since Q1 2017. Three points to note about this data:
- In the 3 years before the Pandemic Crisis, Wall Street analysts most commonly had to reduce their estimates as the quarter progressed. The average cut was -1.8 percent from the start of a quarter through the first 2 months.
- The only 2 exceptions were Q1 and Q2 2018, when analysts had to increase their estimates to account for the late-2017 changes to the statutory US corporate tax rate.
- Since the peak of the Pandemic Crisis in Q2 2020 (the -35.9 pct bar in the chart), analysts have tended to increase their quarterly estimated through the first 2 months of a quarter. The only exception was Q4 2021, which saw no increase even though analysts would have been better off staying truer to their post-pandemic form. The S&P beat the Street’s earnings expectations by 5 percent.
Takeaway: we are back to pre-pandemic norms of analysts’ estimate revisions, where they cut numbers through a quarter such as the current one. On its own, that is no reason for concern. The upward revisions for the 5 quarters after the Pandemic Crisis low were typical of what happens in the early stages of an economic recovery; analysts underestimate both revenues and incremental margins. We are past that phase now, and that’s entirely understandable.
What IS concerning is that Wall Street has back-end loaded its expectations for 2022 in terms of quarterly earnings. The aggregate estimate for Q1 2022 is $52/share and for Q2 it is $55/share; neither seems hard to beat considering that Q4 2021 was $55. It is in the second half of 2022 where things get more difficult, with the Street at $59 – $60/share in Q3 and Q4. That will require good economic growth, both in the US and around the world. Stock markets tend to discount 6 months out, so that puts us solidly into Q3 – Q4 2022. This is why equity markets are so wobbly just now: they simply don’t believe S&P earnings power will be 10 percent better ($60/share versus $55/share now) in 180 days.
Topic #2: FactSet had a wonderful chart in this week’s Earnings Insight report which showed forward S&P 500 Energy sector earnings per share versus spot crude prices over the last 20 years:
The correlation is both intuitive and shows the scale of the relationship. Over the last 2 decades Energy sector annual earnings have troughed at $0 – $10/share and peaked at $50-$65/share. That is powerful leverage to (just) one key commodity price.
Takeaway: Energy sector earnings – and therefore stock prices – go hand in hand with the price of crude. We continue to like Energy stocks but recognize they are tied to a white-hot commodity just now. We’d far prefer to see WTI trade between $120 – $150/barrel for the next 5 years rather than spike to +$200/barrel and then collapse to $100/barrel again.
Topic #3: US wage growth data from Friday’s Employment Situation report. The headline data was strong, with 678,000 jobs added and a 3.8 percent unemployment rate versus expectations of 440,000 jobs added and a 3.9 pct rate. Given the wide gap between Job Openings and unemployed worker data (10.9 million and 6.3 million, respectively), the February numbers should have been good, and they were.
Wages are the one area where Friday’s report showed stabilization rather than above-expectations increases. Average hourly earnings were up 5.1 percent last month, below January’s 5.5 pct but in line with the 3–6-month averages of 5.0 – 5.2 pct respectively.
As a reminder of the long-run relationship between US wage growth and consumer price inflation, here is a look at the year over year increase in wages (black line) and CPI (red line) back to 1965. The first quarter of the chart is 1965 – 1981, when wages not only increased but did so at a generally accelerating rate. The peak for both wages and inflation was in 1980 – 1981, during the back-to-back recessions caused by first an oil price spike due to the Iranian Revolution and then a second, Fed-induced economic contraction created by aggressive monetary policy. After that, both wage growth and inflation moderated. The rightmost part of the chart shows that both have once again reaccelerated.
Takeaway: US economic history very clearly shows that only recessions break wage – cost inflation spirals once they become entrenched. Perhaps 2022 will be different. Last month’s wage inflation readings, which were flat versus recent history, do offer some hope. All we know for sure is that wage growth, rather than job creation, will be the most important line item in future Jobs Reports when it comes to market sentiment surrounding future Fed rate policy.
FactSet Earnings Insight report: https://www.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_030422.pdf