Fundamentally speaking, there are more than a few indications that 2022 earnings estimates are still overly exuberant. However, the bullish optimism currently supports rising stock prices. Such was a point I touched on in this past weekend’s newsletter:
“Overall, 56% of the companies in the S&P 500 have reported actual results for Q3 2021 to date. Of these companies, 82% have reported actual EPS above estimates, which is above the five-year average of 76%. If 82% is the final percentage for the quarter, it will mark with the fourth highest percentage of S&P 500 companies reporting a positive earnings surprise since FactSet began tracking this metric in 2008. In aggregate, companies are reporting earnings that are 10.3% above estimates, which is also above the five-year average of 8.4%.”
Earnings have indeed been impressive, but as we will discuss in more detail, this quarter will likely mark the peak of growth for a while. One particular reason is that while the outlook for earnings remains very bullish, economic growth and inflation trends are not.
The problem for earnings is that weaker economic growth and rising inflation will weigh on profit margins.
Let’s start with economic growth.