US Earnings :Key Takeaways from Q4 and What it Means for the Results

Decoding the Q4 Earnings Season

Remember the pandemic months when companies benefited from operating leverage and reported solid margin expansion? That era has ended. Unfortunately, so has the era of companies benefiting from post-pandemic pent-up demand. This is not such a bad thing though. In the final quarter of 2022, companies focused on improving efficiency, which boosts their fundamentals in the longer run.

One word that slipped into almost every earnings call in the season was “inflation.” Some leading companies were able to raise prices to offset the impact of inflation on their bottom line. However, most companies, across sectors, were forced on trimming costs to defend their margins. Curtailing costs was the main driver of the fourth-quarter earnings beats, which bodes well for an improvement in corporate fundamentals ahead.

All was not well. While around 70% of S&P 500 companies reported earnings beats, the magnitude of the earnings upside, averaging 1.6%, was the lowest in 15 years. Also, the earnings beats were up against low expectations. Looking at profit growth of S&P 500 companies, there was a cumulative decline of almost 5% in the fourth quarter. This also marked the sixth consecutive quarter of margin contraction.

The double-digit price hikes announced by big brands did lead to positive revenue and earnings surprises. Walmart posted revenues of $164.0 billion and earnings of $1.71 per share, with both figures handsomely beating market expectations. Target’s revenue grew 1.3% to $31.4 billion. On the other hand, the price hikes led to a decline in sales volumes. Coca Cola raised prices by 12% in the fourth quarter and saw a 1% hit to volumes, while Procter & Gamble took prices up 10%, and its volumes contracted by 6%. Sentiment for Walmart and Procter & Gamble remains bullish, as can be seen on Acuity’s AssetIQ widget.

The sectors that reported the strongest earnings growth in the fourth quarter were energy, industrials, and consumer discretionary. With companies and individuals focused on cost cutting, tech giants proved to be the biggest drag on S&P 500 profits.

Meta Platforms reported a 52% year-over-year decline in earnings, while Amazon’s net income contracted to $300 million, from $14.3 billion in the same quarter in 2021. Apple reported a 5% decline in sales and Google-parent Alphabet’s revenues came in at $76 billion, almost one-third of the figure reported in the year-ago quarter.

What Does This Mean for the Upcoming Earnings Season?

The big banks will kick off the first-quarter earnings season. Although the US government has taken unprecedented steps to avert a banking crisis after the historic failure of Silicon Valley Bank (SVB) and other banks, the fate of banking stocks hangs on the upcoming results.

Wall Street banks delivered a solid performance in the fourth quarter. JPMorgan Chase reported over $46 billion in pre-tax earnings, the second highest in the banking sector in more than a decade. This banking major rescued First Republic in March, contributing to the $30 billion of deposits pumped into the troubled banks suffering a liquidity crunch. JPMorgan Chase, along with Citigroup and Wells Fargo, is scheduled to report results on April 14. Investors will likely focus on deposits and unrealized losses.

Bank of America and Goldman Sachs are scheduled to report earnings on April 18. While Bank of America reported higher-than-expected revenues and earnings for the final quarter of 2022, Goldman Sachs delivered its worst earnings miss in a decade. Following cuts in earnings estimates, both banks could deliver upbeat first-quarter results.

Energy majors, including ExxonMobil and Chevron, received estimate cuts after the steep decline in oil prices in March. However, oil prices climbed steeply through the last week of March and have remained stable so far in April. These companies could report higher-than-expected earnings in the upcoming season.