The first quarter earnings season is kicking into high gear this week. Over time, earnings growth tends to be the dominant driver of equity returns, so these reports are vital for the stock market’s outlook. The S&P 500 and related exchange-traded funds (ETFs) such as the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) benefited greatly from a robust recovery in earnings in 2021. With that in mind, here’s what you need to know about how this will impact SPY stock.
The pandemic could have crushed earnings, but instead, S&P 500 companies earned record profits in 2021. Analysts see earnings growing again in 2022. But the magnitude of that growth will be essential in determining whether stocks can continue their uptrend, or if the bull market will be on pause for a while longer. So, where do things stand for first-quarter earnings estimates?
According to research firm FactSet, the outlook should be reasonably good. As of April 8, it noted analysts had Q1 earnings growing 4.5% year-over-year (YOY). On the surface, that doesn’t sound great. Corporate earnings have been growing at a double-digit rate since businesses started to reopen in late 2020.
However, as FactSet’s John Butters noted, generally S&P 500 earnings easily exceed estimates. Thus, if the baseline figure heading into this earnings season was 4.5%, there was actually a good chance that the index could still grow earnings 10% or more YOY. That, in turn, should be enough to get the S&P 500 heading back in the upward direction.
However, Q1 earnings might not beat expectations after all. While it’s normally true that analysts set the bar low and then companies beat expectations in aggregate, that doesn’t always happen. In fact, on Monday, Morgan Stanley’s strategist Mike Wilson warned:
“Earnings revisions breadth for the S&P 500 has resumed its downtrend over the past 2 weeks and is once again approaching negative territory.”
Wilson explained earnings outlooks are slipping in sectors such as technology, industrials and consumer discretionary products.
It seems the surge in inflation along with slumping consumer confidence may end up putting a dent in corporate earnings — and SPY stock gains — after all. For a long time, companies have been able to beat and raise on their earnings estimates. However, changing economic conditions may finally tap the brakes on corporate America’s rise in profits and the bull market in the S&P 500. We’ll know a lot more as earnings season reaches its height over the next week.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.