With financials kicking off the first quarter earnings season this week, our current estimate for 1Q22 S&P 500 operating earnings per share (EPS) is $51.01 ($42.80 ex-financials), representing year-over-year growth of 7.6%. However, on a sequential basis this would mark a decline of 10.1% due to the outbreak of Omicron earlier in the quarter, higher commodity costs, higher wages, slower global growth, and a stronger US dollar. Despite these macro headwinds, recent economic data has signaled that demand remained more resilient than expected during the first quarter. While March retail sales came in slightly below estimates at +0.5% m/m, the February growth rate was revised upwards to +0.8% m/m, following a +4.7% m/m jump in January. Furthermore, the surge in oil and gas prices will support significant earnings growth in the energy sector, which should offset some of the decline we may see in other sectors.

At the sector level, financials are currently set to see the largest decline in earnings, with the sector tracking a y/y contraction of 30.3%. So far, despite a majority of the sector beating estimates, profits have tumbled due to higher noninterest expenses, a slowdown in investment banking and capital markets activity, a pullback in home lending, and an increase in credit costs. The decrease in profitability has been slightly offset by higher than expected trading revenues, improving net interest income, and solid loan and card growth. In contrast to financials, energy, materials and industrials look set to post solid earnings. Our model is projecting energy sector earnings grew 296.2% y/y, as oil and natural gas prices increased on average 63.5% y/y and 68.7% y/y, respectively, during the first quarter. Similarly, materials and industrials have benefitted from the increase in commodities prices, as companies in these sectors have taken advantage of pricing power. Within industrials, airlines may remain unprofitable for another quarter but should see losses narrow, as consumers began to travel again with the lifting of economic restrictions. Early reports indicate that the U.S. airlines saw a surge in bookings towards the end of 1Q22.

Consumer discretionary will likely have another difficult earnings season. Higher than expected inflation stemming from the Russia/Ukraine conflict and crippled supply chains may have led consumers to cut discretionary spending, with the auto industry’s earnings left particularly exposed. Communication services, unlike its cyclical counterparts, is set to see earnings struggle, with our model tracking a y/y decline of 9.4% and a q/q decline of 9.2%, as consumers shift their focus to real world services. Technology companies, on the other hand, are in line to see another quarter of y/y earnings growth; however, like many other sectors we are tracking a sequential decline due to a potential pullback in demand. Finishing off growth, health care may be a standout, as the sector’s composition is a diverse mix of companies levered to the COVID and non-COVID world.

Lastly, the typical pattern we have seen over the last 12 months is quarterly earnings estimates begin each reporting season down from the prior period before surprising to the upside and ending the period up sequentially. This is not unexpected given that analysts tend to underestimate earnings by 5.9% at the start of each quarter. However, with 1Q22 earnings currently down 10.1% versus 4Q21, we would need to see significant upward revisions and surprises this time around to close the gap.

Operating EPS contribution by sector
S&P 500

Source: FactSet, Standard & Poor's, J.P. Morgan Asset Management. All data are as of April 13, 2022.

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