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Thoughts From Last Week
Despite the considerable set of headwinds, margins in aggregate have remained steady at 11.2%, with robust nominal growth continuing to boost revenues.
With about half of market capitalization reporting, our current estimate for 4Q22 S&P 500 operating earnings (EPS) is $50.48, representing a y/y decline of 11.0% and a q/q increase of 0.3%. Commentary accompanying results released thus far suggests the year-over-year contraction in earnings is due to higher labor costs, a deterioration in consumer confidence, a stronger U.S. dollar, constrained supply chains and geopolitical tensions. However, despite the considerable set of headwinds, margins in aggregate have remained steady at 11.2%, with robust nominal growth continuing to boost revenues.
Last week, we received notable results at the sector and industry level. While the consumer discretionary sector seems set for a tough quarter of earnings, the auto industry continues to be a bright spot. The positive results were primarily due to improved inventories and higher prices, but margins within the industry did narrow considerably, indicating that demand has begun to normalize. In contrast to consumer discretionary, the information technology sector is currently tracking a solid year-over-year gain in earnings; however, reported results have varied within the sector at the industry level. For example, software earnings have stayed much more resilient relative to those in hardware, with management teams noting a sharp drop-off in the demand for PCs and gaming consoles.
Finally, communication services, similar to many of the hardware tech names, had a difficult quarter, as the sector is levered to discretionary sources of spending. While margins have stayed strong, guidance for the year ahead has indicated that the worst is yet to come, particularly as inflation continues to decelerate and revenue growth subsides. As such, it is unsurprising that 2023 has kicked off with a flurry of job cut announcements, particularly in those sectors that experienced rapid growth during the pandemic and responded by increasing the number of workers they employ.
Source: Company filings, FactSet, Standard & Poor's, J.P. Morgan Asset Management. *4Q22 operating margins is an estimate based on 70.6% of the S&P 500's market cap having reported earnings.