First-quarter earnings season was solid by just about any measure but based on recent market behavior, investors paid little attention. We are experiencing a macro-driven market, so it will likely take positive macro developments, i.e., better news on the inflation front, to turn stocks around.
We expected a high single-digit increase in S&P 500 Index earnings for the quarter, and U.S. companies are delivering. The consensus estimate coming into reporting season called for a 4.7% earnings gain. Now it looks like 10% is possible, with more than 40 index constituents still left to report results [Figure 1].
The revenue growth corporate America was able to generate—over 13% year over year—was perhaps even more impressive. An upside surprise of about 2.7 percentage points doesn’t sound like a lot, but for revenue, it is. Revenue is easier to predict, and companies can’t cost cut their way to more sales. The five-year average is 1.7 points of revenue upside, and the pre-pandemic average was 0.8.
In this inflationary environment, profit margins were the biggest test for corporate America this quarter, and companies passed that test with flying colors. Not only did margins hold up well quarter over quarter—falling less than anticipated—but analysts’ estimates for margins going forward still show expansion from current levels [Figure 2]. We know analysts’ estimates tend to be overly optimistic, but we still view the trajectory of these forecasts as a positive sign for future profitability.
Over the coming months, we will watch inflation closely as supply chain disruptions continue to improve. We expect additional volatility as midterm elections progress. Still, we believe current stock prices present an opportunity for investors to buy high-quality companies at a discount to stay on track toward long-term financial goals.
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