(Yahoo!Finance) - First quarter earnings are trickling in with mixed results.
JPMorgan Chase expressed a more cautious outlook on borrowers Wednesday and finished the day down 3.2% to its lowest level since January 2021, while Delta Air Line's surprisingly favorable travel forecast led to a 6.2% gain. But despite a potential sixth straight quarter of earnings growth, Wall Street analysts are cautioning for a potential growth scare for the balance of 2022 as sky-high earnings estimates return to Earth.
FactSet expects Q1 earnings of 4.7% for the S&P 500, which could easily top 10%, as companies tend to beat profit estimates more often than not. But a year ago, that number was 52.5%, and the quarter after it was an eye watering 91.1%. As these stimulus-fueled profits revert to historical norms, analysts may get caught behind the 8 ball — forced to revise their estimates lower as new economic realities set in.
Goldman Sachs' David Kostin wrote over the weekend that his team expects downside risks to earnings estimates for the remaining three quarters of 2022. He highlighted the perhaps misguided optimism among the current Street forecasts, saying, "Full-year EPS estimates have actually been revised 2% higher since the start of the year and earnings growth is forecast to accelerate in coming quarters."
Yet, economic uncertainty rules. Just prior to the current week's earnings, Kostin wrote, "Analysts appear reluctant to adequately trim forecasts despite the high degree of uncertainty surrounding the economic outlook."
JPMorgan didn't disappoint Kostin's narrative, as the bank increased its loan loss reserves more than expected — a slightly more conservative bet that there may be higher future defaults on loans. While CEO Jamie Dimon downplayed the move, an increasingly hawkish Federal Reserve (caught behind its own inflation 8 ball) and an unsettled war in Europe are giant tail risks.
According to Goldman, analysts are expecting growth of 6% in Q2, 10% in Q3 and 13% in Q4.
But if these forecasts prove too Panglossian, passive investors may be in for a choppy 2022, while stock pickers will need laser-like precision to separate winners and losers.
All about energy and defense
Looking at what's worked so far this year in the S&P 500, energy is the big standout, up 43% in 2022 on surging oil and gas prices. Number two on the winners list is the utilities sector, up 6%, followed by consumer staples, up 2% — both traditionally defensive areas. The sectors housing growthier names — as well as the mega caps — are all off 10% or more. It's been an admittedly tough year for most investors.
Basically, it's been all energy and defense in 2022 with mostly disappointment everywhere else. And while energy is a traditional value play, so are the financials, which happen to be down 5% on the year. Why? U.S. Treasury yields have been screaming higher. This traditionally bodes well for banks, which try to borrow at low rates and lend at higher rates. But with investors pricing in an increasingly hawkish Fed — now expected to raise rates at double the pace each meeting — the short end of the curve is rising faster than the long end. This means bank profits are getting squeezed.
So what stocks should investors buy? Jared Woodard, head of ETF Strategy at BofA, on Yahoo Finance Live Wednesday outlined why the move in energy stocks still has room to run — as well as the broader set of resource and material stocks.
"[E]nergy and resources broadly used to account for 20% to 40% of the total value of the market. Looking back over American economic history, today, they account for less than 7% of that total," said Woodard, who goes on to explain the dynamics in play.
"[W]hether it's resource independence, decarbonization, [or] any of the big policy goals across the political spectrum that are gaining focus today, that these are going to require massive new investments in capacity, both for energy and for metals, and mining," he said.
Woodard points out that America's infrastructure plays — from EV buildouts to repairing dilapidated resources to nuclear power investment — all take more resources.
"[N]one of these investments have been made in the last five years, there's a huge catch up trade to be done here," he said. "And we think that this is going to mark a secular shift with much more upside for both energy and for material [stocks]."
What to watch today
Economy
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8:30 a.m. ET: Retail Sales Advance, month-over-month, March (0.6% expected, 0.3% during prior month)
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8:30 a.m. ET: Retail Sales excluding autos, month-over-month, March (1.0% expected, 0.2% during prior month)
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8:30 a.m. ET: Retail Sales excluding autos and gas, month-over-month, March (0.2% expected, -0.4% during prior month)
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8:30 a.m. ET: Retail Sales Control Group, March (0.0% expected, -1.2% during prior month)
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8:30 a.m. ET: Import Price Index, month-over-month, March (2.3% expected, 1.4% during prior month)
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8:30 a.m. ET: Import Price Index excluding petroleum, month-over-month, March (1.0% expected, 0.7% during prior month)
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8:30 a.m. ET: Import Price Index, year-over-year, March (11.8% expected, 10.9% during prior month)
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8:30 a.m. ET: Export Price Index, month-over-month, March (2.2% expected, 3.0% during prior month)
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8:30 a.m. ET: Export Price Index, year-over-year, March (16.6% during prior month)
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8:30 a.m. ET: Initial jobless claims, week ended April 9 (170,000 expected, 166,000 during prior week)
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8:30 a.m. ET: Continuing claims, week ended April 2 (1.500 million expected, 1.523 during prior week)
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10:00 a.m. ET: Business Inventories, February (1.3% expected, 1.1% prior)
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10:00 a.m. ET: University of Michigan Consumer Sentiment, April preliminary (59.0 expected, 59.4 during prior month)
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10:00 a.m. ET: U. of Mich. Current Conditions, April preliminary (67.0 expected, 67.2 during prior month)
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10:00 a.m. ET: U. of Mich. Expectations, April preliminary (54.0 expected, 54.3 during prior month)
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10:00 a.m. ET: U. of Mich. 1 Year Inflation, April preliminary (5.5% expected, 5.4% during prior month)
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10:00 a.m. ET: U. of Mich. 5-10 year Inflation, April preliminary (3.0% during prior month)
Earnings
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6:45 a.m. ET: PNC Financial (PNC) is expected to report adjusted earnings of $2.77 per share on revenue of $4.78 billion
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7:00 a.m. ET: Wells Fargo (WFC) is expected to report adjusted earnings of $0.80 per share on revenue of $17.77 billion
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7:30 a.m. ET: Goldman Sachs (GS) is expected to report adjusted earnings of $8.90 per share on revenue of $11.73 billion
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7:30 a.m. ET: Morgan Stanley (MS) is expected to report adjusted earnings of $1.70 per share on revenue of $14.20 billion
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7:30 a.m. ET: Ally Financial (ALLY) is expected to report adjusted earnings of $1.94 per share on revenue of $2.14 billion
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8:00 a.m. ET: Citigroup (C) is expected to report adjusted earnings of $1.63 per share on revenue of $18.00 billion
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8:30 a.m. ET: State Street (STT) is expected to report adjusted earnings of $1.47 per share on revenue of $3.04 billion
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Rite Aid (RAD) is expected to report an adjusted loss of $0.49 per share on revenue of $5.97 billion
By Jared Blikre
This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Today's newsletter is by Jared Blikre, a reporter focused on the markets on Yahoo Finance. Follow him @SPYJared
