Only 2 Weeks Until US Companies Report On Their Q1 Earnings

Q1 earnings report

The markets are still mainly concerned with the impact of the war in Ukraine. But soon quarterly earnings will attract all attention again. In about 2 weeks, the Q1 earnings season begins in the United States. 

Q1 Earnings Growth Of The Largest U.S. Companies

q1 earnings growth
Source: refinitiv.com.

Looking at the table, in the last 3 columns you can find the growth of revenues (top row) and the growth of profits (bottom row) for the whole year. In 2020, profits fell by 12.6%, which was directly attributable to the COVID-19 crisis. 

In the following year, the easing COVID-19 situation led to a strong jump in profits. With an increase of 52.4% (circled), 2021 stands out clearly. However, there is also a base effect there, due to the exceptionally low profits in the COVID-19 crisis year.

For 2022, however, profit growth is expected to be only 8.8%. In Q1 2022, it is only 6.4% (in the box). This is already a noticeable decline from the growth of the previous quarters. One reason is the disappeared base effect from the COVID-19 year, but inflation and interest rate developments also weigh on the estimates.

Analysts Are More Optimistic About Energy And Materials

The energy and basic materials sectors are the main beneficiaries of inflation. Here, Q1 earnings growth estimates have risen most significantly over recent months. Thanks to high oil and gas prices, analysts expect earnings growth of 62.5% in 2022. In July 2021, they estimated only 27.8%. This makes the energy sector the one with the highest expected profit growth this year by far. 

But also in the basic materials sector, which includes, for example, steel production, which is very lucrative thanks to high prices, profit expectations climbed from 1.6% to 10.5% recently.

For Consumer Goods Manufacturers, Q1 Earnings Estimates Slumped Significantly

Inflation, and also rising interest rates, are having a negative impact on the consumer goods sector (Consumer Discretionary). Here, estimates for Q1 earnings growth have slumped massively in recent weeks to only 17.5%. 

The market fears that consumers are reducing their spending on a sustained basis. More expensive loans are further dampening the shopping mood.

Financial Sector Feels The Enormous Headwinds

This is also making itself felt in the financial sector. Here, Q1 earnings growth expectations for 2022 were not rosy anyway at -1% in July 2021. But the current estimate of -10.7% for the current year would be a sharp drop in profits. 

The cycle of interest rate hikes launched by the U.S. Federal Reserve and the sharp rise in capital market rates are a bad environment for financial stocks because, for example, lending is falling. So how do you deal with this information as an investor?

Don’t Choose The Wrong Sector Now

This formulation sounds a little too simplistic when you first read it, but it is a good rule nonetheless. Especially when there are significant changes in the investment environment, as is the case right now, sector selection is critical. Otherwise, you’re fighting windmills as an investor. 

Avoid sectors where expectations are massively gloomy or even negative. But also be wary of sectors whose estimates have already climbed too high. Here, stock selection matters even more. Sectors that have stable, positive growth estimates are the easiest. This applies, for example, to the healthcare sector.

Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.
Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.

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