There’s been no shortage of high drama and big numbers from leading US stocks this season, but little clarity so far on expectations for the rest of the year, as our equities expert reports.
A dramatic US earnings season today enters its final phase with the 2022 outlook still unclear after blow-out numbers from Amazon (NASDAQ:AMZN) and weakness from Netflix (NASDAQ:NFLX) and Meta Platforms (NASDAQ:FB).
Some three-quarters of companies in the S&P 500 have now released their figures, with Bank of America reporting that fourth-quarter earnings are currently tracking some 6% higher than the consensus at the start of the year.
The historical average is 2.5% higher but Amazon accounted for 40% of the beat and Apple (NASDAQ:AAPL) a further 12%, while the rate is the lowest since the start of Covid-19.
Guidance has also weakened significantly, but the bank notes that the current Wall Street consensus is down only 0.3% for the first quarter and up 0.9% across 2022.
It said: “Historically, analysts overestimate full-year earnings per share by 5% on average as of February, and we see more downside risks amid rising wage pressure.”
- No trading fees on US shares until 11 February. Click here for details
- US stock market outlook 2022: more record highs for Wall Street?
- Meta’s share crash wipes $200 billion off valuation
The remainder of S&P 500 company earnings are spread out over the next three weeks, with highlights for this week including Walt Disney (NYSE:DIS) on Wednesday and Twitter (NYSE:TWTR), Coca-Cola (NYSE:KO) and Philip Morris International (NYSE:PM) on Thursday.
As over 30% of consumer discretionary earnings have yet to report, there's the chance investors will get a much clearer picture on consumption trends, supply chain bottlenecks and inflation. Most US small and mid-caps have also yet to report.
Out of 75 growth companies in the S&P 500 to have delivered earnings so far, four dropped more than 20% on the day after results. Bank of America said the falls by Netflix, test equipment firm Teradyne (NASDAQ:TER), PayPal (NASDAQ:PYPL) and Facebook owner Meta Platforms represented the highest proportion of growth stocks to drop by a fifth since the tech bubble.
Underperforming growth stocks slumped by more than value stocks the day after results, with the most “crowded” growth trades among particularly heavy casualties.
Slowing subscriber growth drove the share price slide for Netflix, providing an opportunity for star investor Bill Ackman to take a stake, while investment costs and fears over TikTok competition wiped more than $200 billion from Meta's valuation.
- Chart of the week: Netflix shares are half price – should you buy?
- Why Bill Ackman just took a massive punt on Netflix
- Apple, bitcoin, and the US dollar
UBS Global Wealth Management admitted the earnings season has been less of a positive distraction than many investors had hoped, with worries over the pace of monetary tightening and geopolitical risks causing the tech-laden Nasdaq to fall more than 10% and the S&P 500 by 6%.
Even though earnings growth has beaten expectations by a slightly smaller margin than UBS forecast, chief investment officer Mark Haefele believes there are still reasons to be optimistic.
He said the most conspicuous disappointments reflected company specific headwinds, and do not point to a weakening of consumer or business demand. Haefele said: “Notably, Facebook, Netflix, and PayPal have been feeling the effects of greater competition, leading to concern about their outlooks.
“By contrast, strong results from their peers — such as Alphabet (NASDAQ:GOOGL), Visa (NYSE:V), and Mastercard (NYSE:MA) — suggest that end-demand is still healthy. In the technology sector, which has been responsible for much of the recent broader market volatility, we retain a positive view on earnings.
“That said, the mix of earnings may shift, with a weaker outlook for digital media and some e-commerce companies being offset by positive revisions for more traditional IT industries including semiconductors, software, and hardware.”
- Stockwatch: should you copy Fundsmith and buy this FAANG stock?
- Subscribe to the ii YouTube channel for our latest New Year share tips and fund manager interviews
In a note to clients today, UBS stuck to its estimate of 11.5% earnings growth for 2022 and 8.5% for 2023. The year-end S&P 500 price target is 5,100, up from 4,484 at Monday’s close.
Haefele said: “While there remains a risk that the Federal Reserve could tighten by more than markets expect — currently six hikes of 25 basis points each — this is not our base case.
“With demand remaining healthy, we advise investors to focus on winners from global growth. Against a backdrop of rising rates, we expect value sectors to outperform growth sectors.”
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.