Market Week: July 25, 2022

The week in review

Markit Mfg./Services PMI (prelim): 52.3/47.0
Housing starts decreased 2.0% m/m
Initial claims: 251k versus 240k expected
ECB raised rates by 50bps to 0%

The week ahead

July FOMC meeting
2Q22 real GDP
Personal income

Thought of the week
With 22.9% of market reporting, our current estimate for Q2 2022 S&P 500 operating earnings per share (EPS) is $54.28 ($46.59 ex-financials). If realized, this would represent y/y growth of 4.3% and q/q growth of 10.0%.

At the sector level, estimates are pointing toward sizeable growth in earnings among the energy, materials and industrials sectors. This is unsurprising given all three sectors are highly cyclical and directly benefit from the surge in prices we saw in 1H22. Last week, we had a glimpse into how earnings within industrials may fare, with U.S. airlines releasing earnings. Results were positive, as many airlines beat profit estimates on the back of stronger-than-expected demand even amid higher ticket prices and an uptick in flight disruptions. Additionally, while guidance for 2022 was revised downwards for the industry, management teams noted they still expect to record a profit in the coming quarters.

Unlike its cyclical counterparts, financials are having a tough quarter, with operating earnings projected to contract 39% y/y. The decline can be primarily attributed to a build-up of loan loss reserves, a fall in investment banking activity and a slowdown in mortgage fees. These pressures have been partially offset by solid net interest income growth, higher card spending and strong trading revenue.

Despite these higher costs and decline in consumer sentiment, 2Q22 operating margins have remained resilient at 12.8%, above their long-run average of 9.9%. While many companies are yet to report, this could be a signal that corporate profits may not be as weak as recent headlines suggest.

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