Fourth-Quarter Earnings Preview

Reflecting the increasing uncertainty in the market and greater economy, stocks moved 5% on average one day after the third-quarter earnings release. A meager one in twenty-five beat revenue estimates, while nearly three-quarters beat non-GAAP earnings estimates, as detailed in the table below. Aggregate revenues and aggregate non-GAAP earnings of S&P 500 companies both grew 16% YoY. Positive earnings growth in the energy and real estate sector helped offset the negative growth in the financials, consumer discretionary, and communications sector. It mirrors the transition out of the pandemic economy, where many heavily favored companies are no longer benefitting from pandemic-related shutdowns and vice versa.

Fourth-Quarter Outlook 

For the final quarter of 2022, earnings will vary as some companies and sectors are better able to navigate the peculiar economic climate than others. Growth in consumer spending and an improvement in the trade balance led to positive economic growth; however, falling investment dragged on growth. Consumer spending (0.9% QoQ/ 2% YoY) rose as the holiday season provided an opportunity to travel and purchase presents. Lower goods imports and a larger services surplus led to a smaller trade deficit (-1.7% QoQ/ -21% YoY), which will positively contribute to GDP growth. Residential investment (-3% QoQ/ -16% YoY) declined further due to the weakening housing market.  

Financials sector revenue is projected to increase modestly, but profit will be flat in 4Q22 as economic uncertainty plateaued due to continuously cooling inflation and stable employment. Revenue growth will be generated by growing lending activity (3% QoQ/ 12% YoY) and a higher net interest margin (NIM). Still, a sustained lull in investment banking activity and declining fee collection will bring revenue down, and additional loan-loss provisions will eat into profit. Commercial lending (15% YoY/ 3% QoQ) performed better than consumer lending (12% YoY/ 2% QoQ), earnings growth will differ for individual banks based on the composition of lending.

Healthcare sector revenues are expected to report flattish growth in 4Q22, driven by a modest rise in inpatient and outpatient volumes. Margins are expected to improve for health services companies because of a decrease in expenses, mainly for contract workers. Medical Equipment revenues will continue to be supported by the recovery of elective procedures; spending on Medical Equipment is up (4% QoQ/ 15% YoY). 

Materials sector revenue is expected to decline in 4Q22 due to lower commodity prices, reflecting softening consumer demand. The Chemicals companies will also see a modest drop in revenues. The combined effect of lower production levels and decreasing chemical prices will drive down revenue. 

Industrials sector revenues will be hit by lowered traffic of goods and people across all transportation methods. Airline subindustry revenues will suffer as travel demand was strong, but capacity limits and cancelations led to declining sales (–8% QoQ/ 65% YoY). Earnings will be negatively influenced by higher employee wages; ongoing labor talks for port workers, rail workers, and pilots are closely followed. 

Technology sector revenue growth will slow due to higher interest rates. Higher interest rates will hit earnings as most of the growth is financed through short-term and long-term debt. Capital-intensive industries, like hyperscale data centers, will be negatively affected. Capex will be flat, translating into a measurable impact on the semiconductor companies' revenues growth, which results in a low single-digit figure YoY for 4Q22. Paltry revenue growth also stems from supply shortages that led to lower YoY unit shipments but resulted in higher unit prices. 

Communication Services sector’s financials will be impacted adversely. The telecommunications subindustry is committed to expensive network infrastructure spending. Dish Network has undertaken the extremely capital-intensive effort of building a new wireless network. T-Mobile acquired a low-band spectrum to help them provide better 5G coverage. The Media & Entertainment subindustry financials will also suffer as Meta and Google’s advertising revenue fell in the weakening economic environment amidst competition from TikTok. 

Energy sector revenue will still benefit from a strong commodity price environment (WTI +7% YoY/ Henry Hub + 17% YoY), despite the drop in both crude oil and natural gas spot prices. Additionally, 4Q22 earnings will benefit from the stabilization of costs. Crude oil production shows signs of leveling off (0% QoQ). Considering the solid free cash flows (FCF) accumulated during the year, energy companies will continue to be generous with shareholders via increasing buyback authorization and dividends. 

Utilities sector’s avoidance of massive blackouts during the weather spell in late December will allow it to remain on track to meet revenue targets for 4Q22. Consequently, the reliability of the power grid and planning for extreme weather scenarios will be a hot topic during the forthcoming earnings calls. Operational and maintenance costs will continue to be elevated; coal alone is up 20% YoY, despite a mild QoQ decline of –1%. However, the increased sales volumes could relieve them of some of this cost pressure. 

Real estate sector’s struggle perpetuated into 4Q22. Commercial property prices dropped (–7% QoQ/ -8% YoY) as demand for office space fell, and interest rates cut into property values. Similarly, rising mortgage rates (19% QoQ/ 116% YoY) put a dent in new and existing home sales. Residential REITs are expected to report lower earnings in 4Q22 due to cooling rents and slower job growth, underperforming the overall REITs sector. 

Consumer Discretionary sector’s revenue growth will be positive. The gaming industry has experienced an extended period of growth, with twenty consecutive months of gains. A busy sporting calendar in 4Q22 will contribute to the run and generate impressive revenue gains. The hotel industry faces dampened earnings due to seasonally lower demand and elevated costs. Finally, the weakening housing market forced homebuilders to effectively manage operating expenses, reconsider land deals, collaborate with trade partners to optimize the cost structure, and adjust pricing to meet demand. While these effective strategies are expected to boost some homebuilders' revenues in 4Q22, smaller players may see notable sales and new orders declines. 

Consumer Staples sector’s revenue will be bolstered by the holiday season as people stocked up on gifts, party items, and food (2% QoQ/ 6% YoY). While inflation calmed in 4Q22, retailers with private labels will still have an edge as consumers search for lower-priced items, and many production costs have dropped. Lowered transport costs will help the bottom line of the entire industry.