Earnings Will Stink, but Not All of Them | Chief Investment Officer

Earnings season starts this week, with projections for rotten results. Still, not everything will be a cellar-dweller.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

The first big batch of reports are due out Friday for 2022’s fourth quarter, including UnitedHealth Group, Delta Airlines and Citigroup. FactSet’s estimate for S&P 500 companies is minus 4.1%, the first decline since Q3 2020. Only two sectors are expected to show positive earnings per share: energy (riding on still-relatively-high oil prices) and utilities (the ultimate steady-income industry), both with 2% gains.

Beyond that, several individual companies stand to deliver EPS growth that exceeds their numbers for the comparable year-before quarter, according to a Bank of America Securities research report.

Overall, Savita Subramanian, the head of U.S. equity and quantitative strategy at the BofA unit, writes that she expects profit margin compression in 2022’s final quarter due to high operating costs and a tight labor market. But falling inflation—BofA forecasts the Consumer Price Index will drop to 4.4% this year, from last June’s peak of 9.1% and December’s 6.5%— “can actually boost earnings” at certain companies, she insists. The reason: Milder inflation means that demand for their goods and services “should be relatively intact even in case of a mild recession.”

For instance, sports apparel maker Lululemon Athletica should maintain its good position. It has benefited from strong revenue growth, BofA analysts note. Margins this year should hold steady at a comfortable 22%, recovering from a previous supply-chain-linked slide, they believe. The company has reported climbing inventories, but management argues that, since its goods are not seasonal, the buildup will pay off as Lululemon meets ever-higher demand.

Coffee chain Starbucks, in the news lately as the target of a union drive at some of its stores, should see its margins move up to 15.4% this year from 14.3%, by BofA’s reckoning. Founder Howard Schultz, on his third stint as CEO (he came back twice to revamp operations when the company flagged), will leave in the spring. Under him, earnings have been restored, once again, with innovations such as pickup-only sites.

Hospitals have had a rough go during the pandemic. Tenet Healthcare slogged through past labor shortages and a cyberattack last April, which cost it $100 million in revenue. The hospital chain has set about whittling down its debt, and it is better staffed now. Margins should stay at around 11.3%, in BofA’s view. Once-laggard earnings have come back. In the July-September quarter, it beat Wall Street estimates handily.

Another earnings optimist is Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions, who writes in a research note, “Never underestimate the resiliency and flexibility of corporate America” to deliver decent EPS via cost-cutting and other methods.