The chart breaks down S&P 500 annual earnings per share growth into three components – margins, revenues and buybacks. The grey bar represents the contribution from margins, the green bar represents the contribution from revenue and the blue bar represents the contribution from buybacks. In the top right hand corner, we show a breakdown of 2022’s year-over-year earnings growth, relative to the long-run average.

Coming out of the financial crisis, as well as the recession in the early 2000s, margins were the main driver of earnings growth, as revenues were lackluster and companies were not in a position to buy back shares. However, what we have observed is that over the course of a cycle, the contribution from both buybacks and revenues tends to increase. This makes sense as companies find themselves in better financial shape and economic growth accelerating back to a more normal pace.

Meanwhile, given where we stand with respect to the current cycle, whether or not companies can defend margins will be the primary determinant of earnings growth during the coming quarters.