Learnings from Earnings: Macro Crosscurrents Make Growth Elusive

Markets are being shaped by disparate trends from falling energy prices to rising interest rates. During the first-quarter earnings season, company reports indicated that these crosscurrents are intensifying business challenges—and making it harder for investors to find resilient sources of growth.

Investors who sought clarity on the economy and earnings in recent earnings reports were left unsatisfied. It was little comfort that around three-quarters of companies globally beat earnings expectations by mid-month, with reporting season nearly complete. The earnings bar was set low, as many companies had already reduced expectations in anticipation of a recession. But most companies didn’t raise full-year estimates amid pervasive concerns about the outlook.

Companies Face Conflicting Trends

While the long-expected recession hasn’t arrived, macroeconomic conditions are murky. High inflation is stickier than expected, short-term interest rates continue to rise and banking sector turmoil is adding instability. Yet energy prices have fallen, supply chain disruptions are easing and China’s economy is reopening. Some of these crosswinds are butting against each other, so investors must find companies that are navigating them with skill.

Earnings growth trends reflect the muddy environment. In both global and US markets, six sectors contributed to earnings growth while five detracted, leading to overall flattish growth of +0.3% for the MSCI World and –0.2% for the S&P 500 (Display). The consumer discretionary sector was a major contributor to earnings growth, despite mounting pressure on US consumer spending from higher rates and recession concerns. Information technology and healthcare have weighed on earnings growth, even as some industry segments remain robust. And despite recent bank failures, financials added the most to earnings growth, as lenders broadly tend to benefit in high interest-rate environments.