We anticipated more modest upside to estimates in the second quarter and that’s what we got.
Some of the key numbers include:
• Estimates for S&P 500 earnings per share (EPS) growth coming into reporting season
were around 4.1%. That number looks like it will end up at around 6.2%, according to
FactSet estimates [Figure 1].
• Revenue grew a very solid 14% year-over-year, well above the roughly 10% expected
when earnings season began.
• A solid 76% and 71% of S&P 500 companies beat their earnings and revenue targets,
similar to five-year averages.
• Energy delivered the fastest earnings growth among sectors, nearly quadrupling profits
from the year-ago quarter. The sector also posted the second biggest upside surprise
among all sectors at 9 percentage points, trailing only utilities.
In our last Equity Strategy Insights publication, we highlighted profit margins as one of the key
factors to watch during reporting season. We had posited that published estimates for profit
margins were too high but that they were unlikely to come down significantly. Estimated profit
margins for the second half of 2022 did indeed come down as companies reported, but not
dramatically so.
Strong revenue growth in the mid-teens is one big reason why margins are holding up in this
inflationary environment. That additional revenue, and the pricing power that helps produce it,
provides companies with some margin cushion to help them reach their earnings targets.
Analysts’ estimates no longer reflect margin expansion in coming years. We know analysts’
estimates tend to be overly optimistic, but we still view expectations of stable margins as a
positive sign for future profitability. That said, earnings targets will be very tough to reach in
2023 if high inflation lingers. The pace of improvement may be stubbornly slow despite some
progress toward normalizing supply chains and loosening labor markets.
Coming into earnings season, the overwhelming view from Wall Street strategists was that
earnings estimates had to come down substantially. The thought process for many was that
earnings drop in a recession, so while 2022 profits may be near consensus estimates (our
expectation), 2023 may see a profit decline. That would make our $235 estimate for S&P 500
EPS in 2023 overly optimistic and potentially put something like $200 in play (not our

Figure 2 shows how resilient 2022 earnings estimates have been. The consensus estimate for
S&P 500 EPS for 2022 at $226 is still slightly above our $225 forecast. And despite coming
down about $8 from its prior high, the consensus estimate for S&P 500 EPS in 2023 is still
near $244, well above our $235 estimate despite mostly cautious guidance from corporate
America and pretty dour sentiment from business leaders.

We still feel good about our $235 number for 2023 S&P 500 EPS, representing only a 4%
increase over our 2022 estimate. We’re counting on inflation pressures easing next year while
economic growth potentially picks up from the anemic level in the first half of 2022 to provide
additional support. Third quarter gross domestic product (GDP) is tracking to growth of 1.6%
annualized according to the Atlanta Federal Reserve. And although the Institute for Supply
Management (ISM) manufacturing survey has been falling much of this year, the expansionary
52.8 reading in July is a positive earnings signal.

In a downside economic growth scenario, something below our 2022 earnings forecast of $225
is possible. An official recession in 2023 is also possible—our odds stand at 50%. Also,
consider higher taxes from the Inflation Reduction Act will likely trim $2 to $3 off next year’s
S&P 500 Index earnings, while fewer buybacks in response to the 1% buyback tax may leave
share counts higher and therefore EPS slightly lower.
In our Midyear Outlook 2022: Navigating Turbulence, released back in mid-July, we wrote that
it was tough to see the bull case through the cloud cover, but that an improved macroeconomic
environment may set the stage for higher valuations, further earnings growth, and solid gains
for stocks over the rest of the year.
Some of those gains have already come—the S&P 500 is up 6% since the publication was
released on July 12, even after Friday’s 3.4% decline. Despite an increasingly hawkish Federal
Reserve (Fed), and a seasonally weak month of September right around the corner, we still
see more upside for stocks over the balance of 2022. Some inflation relief is likely coming,
which can help foster interest rate stability. Corporate America continues to show its resilience.
And using history as a guide, seasonal forces and midterm elections should provide a fourth
quarter tailwind. However, in the very short term, the market’s direction will likely depend on
when the Fed signals its rate hiking campaign will end.
We maintain our year-end fair value S&P 500 target at 4,300-4,400 based on a price-toearnings ratio of 18-19 times our $235 EPS estimate for 2023. In a soft-ish landing scenario,
perhaps a 50% probability at this stage, we see upside to that target range. On the flip side, a
potential Fed policy mistake, a possible recession in 2023, and heightened geopolitical
tensions present risks to the downside.

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-w eighted 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
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 w ith low er 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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