US corporate profits, economic outlook surprisingly optimistic

A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., June 7, 2022. REUTERS/Brendan McDermid

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NEW YORK, Aug 2 (Reuters) – Corporate America is reporting mostly upbeat news this earnings season, surprising investors who had been bracing for a gloomier outlook on both business and the economy.

More than halfway through the second quarter reporting period, S&P 500 company earnings are estimated to have increased 8.1% from the prior year quarter, compared to an estimate of 5.6% in early July , according to IBES data from Refinitiv as of Tuesday. .

Some 78% of earnings reports are beating Wall Street expectations, above the long-term average.

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Earnings growth estimates for the third and fourth quarters have been lowered, but remain clearly positive. S&P 500 earnings for all of 2022 are now forecast to grow 8.1% versus an estimated 9.5% in July, according to Refinitiv data.

Investors worried that if high inflation and rising interest rates were about to push the economy into a recession, earnings estimates for 2022 were too high.

Increasing the risk that the economy was teetering on the brink of a recession, the US Commerce Department said last week that the US economy unexpectedly shrank in the second quarter, the second straight quarterly drop in gross domestic product. read more

Concerns about a possible recession had caused a sharp sell-off in shares in the first half of the year. But the S&P 500 (.SPX) and Nasdaq (.IXIC) ended July with its biggest monthly percentage gains since 2020, in part due to higher-than-expected gains.

“The consensus view (was) that earnings would just fall apart,” said Jonathan Golub, chief US equity strategist and head of quantitative research at Credit Suisse Securities. “And it just didn’t turn out that way.”

Company reports show demand remains strong and sales are holding up, he said.

“If you want to say what the health of the economy is, you measure it in sales,” Golub said.

Year-over-year revenue for S&P 500 companies in the quarter is expected to have risen 12.5% ​​through Tuesday, compared with an estimated 10.4% in early July, according to Refinitiv data.

Optimistic forecasts from heavyweights Apple and Amazon.com (AMZN.O) buoyed investor sentiment late last week, while Chevron Corp (CLC.N) and ExxonMobil (XOM.N) reported record quarterly revenue.

Apple said parts shortages were easing and demand for iPhones continued, while Amazon.com forecast a rise in third-quarter revenue.

“It’s held up pretty well, particularly for large-cap names, but of course people expected the worst,” said Rick Meckler, a partner at Cherry Lane Investments, a family-owned investment office in New Vernon, New Jersey.

To be sure, the news has not been generally positive. walmart (WMT.N)unsettled investors early last week when it cut its full-year earnings forecast, blaming rising food and fuel prices. read more

That raises concerns about consumer health and the outlook for other retailers, most of which have yet to report results for the latest quarter.

In addition, analysts have been cutting their third-quarter earnings growth estimates more than usual compared to “before the pandemic or in the last two years,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note this week. .

Whether earnings forecasts hold is key for valuations. The S&P 500’s 12-month price-earnings ratio, at 17.5 as of Tuesday, is down from 22.1 at the end of December but still above the long-term average of around 16, Refinitiv data showed. .

Other strategists said the season follows a normal pattern: Companies are often more negative than positive with their outlooks, so earnings forecasts for upcoming quarters are typically lowered during a reporting period.

“So far, what has happened is not worse than feared. And the market was already primed for some bad news,” said Keith Lerner, chief market strategist at Truist Advisory Services in Atlanta.

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Information from Caroline Valetkevitch; Edited by Alden Bentley and Nick Zieminski

Our standards: The Thomson Reuters Trust Principles.

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