Do Earnings Reports Predict a Recession?

your Daily Profit issue [Daily Profit]( Do Earnings Reports Predict a Recession? [By Ian Wyatt] By Ian Wyatt Tuesday, July 26, 2022 FAANG Stocks Are Dead - Now [“MACE”]( is the new FAANG and early investors could see double or even triple the returns that the old tech giants offered. [To see how to get the biggest gains click here now.]( Investors were extremely pessimistic heading into corporate earnings season. The biggest risk was that sky-high inflation would finally start to hurt corporate profits. And that America’s biggest companies would begin trimming earnings expectations. The good news for stocks is that this isn’t happening – yet. One-fifth of companies in the S&P 500 have reported second quarter earnings. The early results from these companies suggest that profits are holding up. Consider the headline numbers… - 68% of companies have reported EPS exceeding Wall Street estimates - Quarterly earnings growth is 4.8% and revenues grew 10.9% - Profit margins are 12.4% On the surface this looks pretty decent. Companies are growing their revenues and earnings. They’re beating the analyst expectations. And profit margins are solid and above average. However, looking beyond the headlines shows signs of weakness. Energy Stocks Save the S&P 500 Energy stocks are having a blockbuster quarter – thanks to soaring prices for oil and natural gas. The energy sector saw earnings grow by 265% during the period from April – June. That makes it the single largest contributor to quarterly earnings growth. The S&P 500 has seen a 4.8% increase in EPS during the quarter. Yet excluding the energy sector – the S&P would’ve seen earnings drop 4.5%. Energy stocks are finally pulling their weight after years of lagging the stock market. What’s Next for Stocks Stocks dropped over 20% during the first half of 2022. That drop has occurred despite growing corporate earnings. The following chart from FactSet Research shows the performance of the S&P 500 index and the earnings growth for the index. From March 2020 – December 2021 the stock market was soaring. You can see that the S&P 500 price (blue line) grew dramatically more than corporate earnings (black line). This means that the gains for the stock market were being fueled by an increase in price-to-earnings multiples – rather than being driven by earnings growth. Stock market performance connected at the hip with earnings growth. They don’t always move in lock-step. Yet the correlation is extremely strong over longer periods of time. The price of the S&P 500 index grows [BECAUSE earnings grow.]( The good news is that the valuation for stocks has fallen dramatically. The S&P 500 is now trading at a price-to-earnings ratio that’s below its 5- and 10-year averages. The more reasonable valuation creates an attractive entry point for buying stocks. The big unknown is whether the U.S. economy is heading into a recession. And whether earnings will turn negative in the next year. Wall Street’s analysts currently expect corporate earnings to grow by nearly 10% in 2022. That number could be far too optimistic if there is a recession. The falling price for oil and gas in the past month is benefitting consumers. However, it could hurt future earnings growth for energy stocks. And you just saw that the energy sector is propping up corporate earnings. 80% of the S&P 500 stocks still need to report earnings. With 175 additional companies reporting this week – we’ll soon have greater insight into the results by America’s biggest stocks. The S&P 500 is up more than 5% in July. This suggests that investors have a positive view of the earnings results thus far. Plus, we’re even seeing stocks rally even after reporting disappointing numbers. The initial results and outlook from corporate America have been better than expected. Let’s hope that trend continues in the coming weeks. Right Now… “MACE” is the new FAANG and early investors could see double or even triple the returns that [these old tech giants]( offered. [See the case for MACE and which stocks to get into TODAY.]( Yours in Wealth, [Ian Wyatt] Ian Wyatt [Visit WyattResearch.com]( [Take a 7 day break from these emails]( [Unsubscribe from these types of emails]( [Manage your email preferences]( [Wyatt Investment Research] Disclaimer & Important Information [Wyatt Investment Research (“WIR”)]( owns and publishes the website WyattResearch.com, other web sites, and, through its subscription services, various investment newsletters, trade alerts, and other investment-related educational materials. Those publications are informational in nature – WIR is not your financial adviser and does not provide any individualized investment advice to you. 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