Making sense of the earnings season in equities

Since the end of the first quarter of the year on 31st March, the accountants have been beavering away tallying up the figures for listed corporates publishing their results for the first three months of the year, and the past 12 months. The reporting ‘season’ began in mid-April and will run through until the end of May.  

As of 8th May, more than 90% of corporates had reported. Whether or not you follow the fortunes of US stockmarkets – in particular the S&P 500 and the Nasdaq – you will know some of the companies involved. Household names in the world of tech and e-commerce such as Meta (Facebook), Apple, Alphabet, Netflix, Microsoft and Amazon, have all reported, alongside the likes of Elon Musk-led electric car manufacturer Tesla, and Warren Buffett’s Berkshire Hathaway.  

So far, the results have been largely encouraging. Around 77% of companies delivered positive earnings per share (calculated by taking a company’s quarterly or annual net income and dividing by the number of its shares of stock outstanding). Around 74% had reported a positive revenue surprise versus analysts’ expectations.  

According to the same FactSet data sheet, we have seen a year-over-year earnings growth of around 9.1%, a positive sign but below the five-year average of 15%, and the 10-year average of 8.8%. Still, in the context of the big headwinds currently hitting markets – high inflation and war in Ukraine – growth remains relatively robust for most companies.  

Winners and losers  

So, from a sector level, which kinds of companies have performed well? There’s been a pattern of some positive earnings surprise in the likes of healthcare, telecommunications and, perhaps, less surprisingly, energy. As you can see from the chart below, it’s clearly been a more difficult time for consumer discretionary areas – such as retail and leisure – as inflation has cut the disposable income that people have to spend on non-necessary items.  

Sector level S&P 500 earnings growth for Q1 2022 

Source: FactSet. Blue bars represent EPS increase as of 16th of May; Grey bars represents earnings expectation from analysts as of the 31st of March. 

The sector that seems to have dominated the headlines once again is technology, with a mixed picture for Big Tech causing a sharp downturn in markets, especially the Nasdaq, during April and May.  

A case in point was Netflix. While the streaming platform reported positive earnings ahead of analysts’ predictions, its share price fell more than 35% in one day (20 April). The company announced it had lost more than 200,000 subscribers in the first three months of the year, and said it expects to lose two million more over the next quarter.  

Similarly, Amazon had a bad day when it announced results a week later; shares were down 14% on the day as it reported its first net loss since 2015. Online sales slipped 3% in the first quarter of the year due to consumers returning to bricks and mortar stores as pandemic restrictions lifted.  

Shares in Alphabet, the parent of Google, and Apple also trended downward as tech took something of a hit, though the venerable Microsoft was a standout performer following  strong revenue guidance for investors, while Meta (Facebook) also had a good day as its earnings beat analysts’ expectations.  

A brutal month then for the tech-heavy Nasdaq, which fell 13.5% in April, and was down more than 20% for the first four months of the year – putting it in ‘bear market’ territory. While many tech behemoths have become an essential part of many people’s everyday lives – as owners of iPhones and Netflix subscriptions will testify – they benefitted greatly from the ‘work from home’ premium as more of us engaged digitally during lockdown. 

However, online subscription levels have evidently plateaued or declined in some of these businesses, particularly considering the squeeze on household incomes. Given these concerns, Nutmeg does not currently invest in the Nasdaq in any of our portfolios, though we do hold the likes of Apple, Microsoft, Alphabet etc through our holdings in the S&P 500 where they are also listed given their scale as some of the world’s largest companies.  

In recovery mode 

While the fortunes of many of the so-called pandemic winners are turning, others have profited as the nature of the global economy has shifted back into recovery mode following a miserable two years in lockdown – though some countries, such as China, continue to enact policies to keep citizens off the streets.  

Energy companies that suffered as the global economy halted have bounced back as demand recovers and prices rise on the back of the war in Europe. For example, in the US, refiner Valero Energy saw earnings blow past expectations amid rising demand and lower supply dynamics.  

Energy makes up only a small part of the S&P 500 overall – around 3% – so is not a large part of Nutmeg’s holdings in this country. However, the sector does make up a much larger proportion of the Canadian, Asia Pacific, and UK markets, and the Nutmeg team has upped exposure to all three of these in recent weeks.  

Panning the picture wider to the UK in particular, there were particularly encouraging results for BP and Shell on rebounding oil and gas prices, the latter reporting its highest quarterly profit since 2008. However, it is worth considering that energy stocks by their nature remain highly correlated to the oil price, which can be especially volatile, so are best held within a highly diversified global multi-asset portfolio. 

A long-term view 

While Nutmeg portfolios track markets, rather than picking stocks, the investment team nevertheless maintained a strong grasp of what’s behind the movements in the big constituents and sectors that characterise different indices.   

The results for the first quarter of the year, shows just how quickly the fortunes of different companies and sectors can change; it’s a good reason, we think, to invest over the long term, which, with time on your side, can help ride out some of these quarterly trends and subsequent volatility.  

For clients interested in ongoing commentary on market movements, we recommend our monthly investor update and view from the investment desk videos.  

Risk warning  

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.