In our earnings season preview, we expected a high single-digit increase in S&P 500 Index
earnings for the quarter, and that is what we got. The consensus estimate coming into
reporting season was calling for a 4.7% earnings gain, and now it looks like 10% is possible
with more than 40 index constituents still left to report results [Figure 1].

This is an impressive result given the challenges currently facing companies—intense cost
pressures, COVID-19, and Russia’s Ukraine invasion with resulting sanctions.
The revenue growth corporate America was able to generate—over 13% year over year—was
perhaps even more impressive. An upside surprise of about 2.7 percentage points doesn’t
sound like a lot, but for revenue it is. Revenue is easier to predict, and companies can’t cost
cut their way to more sales. The five-year average is 1.7 points of revenue upside, and the prepandemic average was 0.8.
Here are some more numbers to put these impressive results in perspective:
 A very strong 78% of S&P 500 companies beat earnings estimates for the quarter,
slightly above the long-term average of 77%.
 Excluding financials, S&P 500 earnings per share are on track to grow about 14%.
 Excluding energy, S&P 500 earnings per share are on track to grow only about 4%.
 The biggest upside earnings surprises came from utilities, while consumer staples,
financials, healthcare, and materials also generated strong upside surprises.
 Consumer discretionary was the only sector to miss analysts’ earnings target, falling a
massive 35% short due to Amazon. The LPL Research Strategic and Tactical Asset
Allocation Committee (STAAC) remains underweight to the consumer discretionary
 A solid 74% of S&P 500 companies have beaten revenue forecasts, above the five-year
average of 69%.
 About half of the revenue growth for the quarter came from the energy and healthcare
 The biggest upside revenue surprises came from energy and utilities, while only
communication services missed analysts’ revenue target.
In our earnings season preview on April 18, we highlighted three things to watch: margin
pressures, pricing power, and supply chain status. Clearly two of those three things relate to
profit margins, though we would argue all three do.
In this inflationary environment, the revenue is coming through. But it is profit margins that
were the biggest test for corporate America this quarter, and companies passed that test with
flying colors. Not only did margins hold up well quarter over quarter—falling less than
anticipated—but analysts’ estimates for margins going forward still show margin expansion
from current levels [Figure 2]. We know analysts’ estimates tend to be overly optimistic, but
we still view the trajectory of these forecasts as a positive sign for future profitability

However, these margin forecasts will be tough to reach in the coming year if high inflation
lingers. Although signs of a peak in inflation have emerged, the pace of improvement may be
stubbornly slow. It’s difficult to envision the labor market getting significantly better in a short
period of time, but labor market participation is key to alleviating wage pressures and wages
are the biggest component of companies’ cost structures. And company guidance suggests
supply chain disruptions may linger well into the fall, longer than we previously anticipated.
Inflation is not a new challenge for companies. The Consumer Price Index has increased more
than 6% year over year for seven months now. Last fall, before Russia’s Ukraine invasion, in
Outlook 2022: Passing the Baton, we wrote the following:
With stable profit margins and increasing share buybacks likely next year, a double-digit
percentage increase in S&P 500 earnings per share (EPS) is a possibility. But COVID19-related supply chain issues and materials and labor shortages are risks that could
lead to higher costs in 2022, weighing on profit margins.
That led us to our conservative forecast for S&P 500 EPS in 2022 of $220, only 6% above the
now-final EPS number for 2021. But instead of seeing estimates come down because of these
cost pressures, they have continued to move higher. The consensus estimate for S&P 500
EPS in 2022 has increased 2.6% this year to $229.22 per share, which is remarkable
considering how difficult the operating environment has become [Figure 3].

How have they done it? Primarily through pricing power that has boosted revenue. The
consensus estimate for revenue this year has increased 4.2% year to date. It hasn’t been
difficult to sell customers on the idea of paying higher prices in this environment when higher
costs are affecting everyone. The good news is higher wages and pandemic savings have
helped consumers afford those prices.
Companies have also managed higher costs efficiently, in many cases doing more with less.
That narrative certainly fits the energy sector which is also enjoying a revenue windfall. Energy
sector employment has fallen significantly over the past couple of years, according to Bureau
of Labor Statistics data. National employment is still below pre-pandemic levels, yet trailing 12
month S&P 500 revenue is up 12%.
Bottom line, we recognize our $220 per share forecast for 2022 S&P 500 earnings is probably
too low and that number probably comes in closer to $225, up 8% year over year.
Earnings will be part of the stock market rebound we expect over the rest of the year. We
expect S&P 500 earnings to grow high single digits this year despite the aforementioned
challenges. Those gains, coupled with much more reasonable valuations following the selloff,
may help push stocks higher in the coming months.

However, inflation is the most important piece of the story. Until markets get confidence that
inflation will move steadily lower over time and become comfortable with the role the Federal
Reserve will play to get us there, P/E multiple expansion will be tough to come by and stocks
may remain in correction territory. On the other side, keep in mind just two additional points on
the P/E—from 16.5 to 18.5—would push the S&P 500 12% higher.
We continue to prefer a modest overweight allocation to equities and a slight underweight to
fixed income relative to investors’ targets, as appropriate. Our year-end 2022 fair value target
for the S&P 500 is 4,800–4,900, 19% above the May 13 closing price at the low end. We are
actively considering adding to our equities allocation.

This material is for general information only and is not intended to provide specific advice or recommendations for any
individual. There is no assurance that the view s or strategies discussed are suitable for all investors or w ill yield positive
outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as
predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are
unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance
of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no
guarantee of future results. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of
their products or services. LPL Financial doesn’t provide research on individual equities.
All information is believed to be from reliable sources; how ever, LPL Financial makes no representation as to its completeness
or accuracy. The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance
of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major
industries. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a
market basket of consumer goods and services. The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit
earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more
for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS
serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important
variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
All index data from FactSet.

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