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Earnings Fuel Optimism

Investment Insights: Market Update
HIGHLIGHTS:
  • Second-quarter earnings results are showing stronger-than-expected growth overall, but less companies beating expectations.
  • Earnings have grown by 8.7 percent so far, notably higher than the 4.0 percent prediction at the end of June.
  • The energy sector saw outstanding earnings and revenue growth as elevated crude oil prices during the quarter drove results.
  • Geopolitical tensions were renewed after House Speaker Nancy Pelosi landed in Taiwan, with economic reactions from China.

Corporate earnings, the ballast of the capital markets ship, seem to be keeping things steady as headlines create stormy waters for investors. Recent news has fixated on House Speaker Nancy Pelosi's trip to Taiwan and the US reporting two consecutive quarters of negative growth. However, earnings remained a focal point for markets. Thus far, 372 companies within the S&P 500 have reported, with 74 percent of those beating analyst earnings expectations—slightly weaker than the 87 percent seen last quarter. Given that investors entered this season with some pessimism, the results provide some rays of hope. This is underscored by the fact that earnings have so far grown by 8.7 percent, notably higher than the 4.0 percent prediction at the end of June. The S&P 500 has gained roughly 10 percent since the start of the second-quarter earnings season.

To no surprise, energy––at a whopping 75 percent year-over-year increase––is by far the top sector when reviewing revenue growth. Materials and consumer discretionary sectors, both in the mid-teens for growth, followed at a distant second. Energy's outlier results clearly stem from the significant moves in crude oil prices, where a barrel of WTI oil increased from $80 a year ago to over $120 in June before falling in recent weeks. Consumer spending on basic goods and services have provided a boost to select sectors, such as consumer discretionary. Despite the revenue increase, company results in the sector, with just half beating estimates, have still been mixed.

The muted positivity of earnings has been somewhat overshadowed by a renewal of US-China tensions. Chinese officials had warned the Biden administration against Pelosi's landmark trip to Taiwan, which was the first by a House Speaker in 25 years. China is taking time to gauge an appropriate response, ranging from military drills to potential economic backlash. China's government has already restricted trade, curbing imports of fish and fruit from Taiwan, as well as exports of sand—a key construction material—to the island. From the US point of view, other ripples may occur if China starts to target foreign reserves, specifically the country's significant holdings of US government bonds. Risk remains in the market. But we expect stocks will find some additional footing on earnings before potentially waning as economic news and mid-term elections spur volatility.

Market Dashboard
Financial market data for various time periods covering global asset classes.  Data as of August 2, 2022. 
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Contributors

[Contributors Section]
Cyrus Charna
Investment Strategy Officer
Ben Baier
Lead Investment Officer
Wade Balliet
, CFA
Chief Investment Adviser