STOXX 600 22Q1 Earnings Preview: Earnings Growth Remains Resilient

As we enter the 22Q1 earnings season, the market will be adapting to ‘a new normal’ as we exit 2021 which saw STOXX 600 earnings growth increase by 76.6%, a record-year in large part to base effects.

The current 22Q1 blended earnings growth rate of 25.1% confirms the beginning of a transition to more reasonable year-over-year (YoY) growth rates off the back of a historical 21Q1-21Q4 earnings season where YoY earnings growth was 96.4%, 152.6%, 60.5%, and 59.2% respectively. The 10-year average earnings growth rate for the STOXX 600 is 7.2%.

Exhibit 1: STOXX 600 YoY Growth Rates

In a typical quarter (since 2018), YoY growth expectations decline by an average of 1.2 percentage points (ppts) from the start of the quarter to the start of the earnings season. Seeing an increase in growth expectations heading into earnings season is uncommon and has only occurred five times over this period, but we have seen exactly this behavior for the fifth consecutive quarter.

22Q1 earnings growth expectations have improved over the last two months has changed from 17.7% on February 1st to 25.1% on April 12h, a massive improvement of 7.5 ppts. This improvement appears to defy the multiple headwinds in Europe including negative consumer sentiment, geopolitical tensions, record levels of inflation, supply chain bottlenecks, and multiple rate hikes from the Bank of England and potential upcoming hikes from the European Central Bank.

This raises the question of whether analysts have been too slow in downgrading estimates vs. continued optimism about the global recovery?

While no companies have reported 22Q1 earnings thus far, we have observed a gradual decline in the percentage of companies that beat earnings expectations when reporting as shown in Exhibit 2. 21Q1-21Q4 have seen earnings beat rates of 71.7%, 63.2%, 63.3%, and 61.1% respectively vs. the 10-year average beat rate of 52.7%.

Exhibit 2: STOXX 600 Beat Rate %

Furthermore, while the percentage of companies that beat earnings expectations has declined over the last four quarters, the earnings surprise factor has followed the same path. The earnings surprise factor for 21Q1-21Q4 is 22.5%, 23.1%, 12.2% and 0.7% respectively. The prior quarter earnings surprise of 0.7% is well below the long-term average of 5.8%.

A combination of lower beat rates and lower surprise factors will certainly keep investors on edge and may impact overall sentiment this quarter.

Using Refinitiv Datastream, the GFK U.K. Consumer Confidence Index reading has sharply declined from -7 in July 2021 to -31 in March 2022, which is the third-lowest reading since the height of the pandemic. A similar picture is seen in the Euro Zone Consumer Sentiment indicator which has declined from -4.4 to -18.7 over the same period. These indicators look at consumer sentiment over the next twelve months.

Which sectors are driving earnings growth?

Exhibit 3 shows 22Q1 earnings and revenue growth rates at an index and sector level. The Energy sector growth rate forecast is currently 177.6%, which is by far the highest sector growth rate and is expected to be the 4th largest YoY growth rate for the sector since Refinitiv has tracked this data. This follows the 395.7% YoY growth in earnings the energy sector posted in 21Q4 as the sector continues to benefit from higher oil prices compared to a year ago.

Exhibit 3: STOXX 600 22Q1 Growth Rates

(Click on image to enlarge)

Source: STOXX 600 Earnings Outlook, April 12, 2022

From an earnings contribution perspective, the energy sector is currently forecasted to contribute 18.8 ppts towards the index growth rate of 25.1%, accounting for over half of the earnings contribution despite being only the 8th largest sector by market cap. Said differently, the energy sector has a market cap weight of 6.0% in the overall index yet has an earnings weight of 23.4%.

Basic Materials (2.5 ppts), Industrials (2.3 ppts), and Consumer Cyclicals (1.4 ppts) are the next largest sectors from an earnings contribution perspective. These three sectors combined with the Energy sector are expected to contribute 99.6% of the overall index growth (25.0 ppt of the 25.1% 22Q1 earnings growth rate).

Analysts Revisions

In attempting to answer our original question above as to whether analysts have been too slow in downgrading estimates, we turn to the STOXX 600 Earnings Outlook report.

Looking at Exhibit 14A and 15A of the report, we observe a gradual decline in the upward estimate revisions ratio. Using weekly snapshots of estimate revisions data for full-year (FY1), the ‘Up Revisions %’ has declined from 59% in mid-February to a current reading of 48%. This ratio is calculated by looking at the total number of upward revisions over a seven-day period relative to the total number of estimate revisions, repeated on a rolling weekly basis. Refinitiv has tracked this data since 2018 and the long-term average ‘Up Revisions %’ is 49%.

Exhibit 4: STOXX 600 Earnings Estimate Revision Trend

Source: STOXX 600 Earnings Outlook, April 12th, 2022

It will be remained to see if the downgrade in FY1 estimates will be passed through into the current 22Q1 estimates, as growth for the quarter has remained resilient thus far. Another possibility is that the downgrade in FY1 estimates is a reflection of greater weakness in the back half of 2022 given the impact of geopolitical tension and higher commodity prices resulting in record inflation levels.

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