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Thoughts From Last Week
Following last week's results, our estimate for 3Q22 S&P operating margins dipped to 12.0%, down from 12.4% a week prior and 13.3% from a year ago.
With over half of the market reporting, our current estimate for 3Q22 S&P 500 operating earnings per share (EPS) is $52.42. If realized, this would represent y/y growth of 0.8% and q/q growth of 11.9%. Estimates for third quarter earnings saw a notable decline last week, as disappointing results from the “big tech” names weighed on expectations. Profits were constrained by a number of headwinds, including a stronger U.S. dollar, weakening demand for hardware, a decline in ad revenue, higher operating costs and an increase in headcount. Moreover, many of the large tech companies continue to record losses on their newer business ventures, which has placed further pressure on the bottom line. Looking ahead, in anticipation of slowing demand, many management teams outlined plans to slow hiring and cut costs in an effort to protect profit margins.
In contrast to technology, results in consumer discretionary have been more resilient despite persistent inflation and depressed confidence. While auto inventories remain tight, auto companies are reporting record revenue due to higher prices, which has been key in boosting profits. Additionally, hotels and food have seen minimal demand destruction in the wake of higher prices, as the summer travel season, strong branding and the economic reopening buoy earnings.
While strong nominal GDP will likely keep revenues afloat, the key will be whether companies can adequately defend operating margins as economic activity slows in 2023. Following last week’s results, our estimate for 3Q22 S&P operating margins dipped to 12.0%, down from 12.4% a week prior and 13.3% from a year ago.
Source: Company filings, FactSet, Standard & Poor's, J.P. Morgan Asset Management. *3Q22 estimate based on 67.4% of the S&P 500's market cap having reported earnings.