With nearly 70% of S&P companies reported, 4Q earnings are handily beating estimates. 79% of reporters have posted better than forecast EPS and the S&P has climbed 4.5% during reporting. Economic growth expectations have been revised higher as well, and inflation has remained stable. Our sentiment internal (company) and external (macro) management sentiment readings have rebounded in 4Q after a mixed start. Better macro trends are creeping into investors sentiment as well (HERE). The bottom line is that S&P earnings continue to surprise to the upside by a wide margin.
At the sector level, external sentiment changes over the past quarter have almost all been positive. The only decliners are Industrials and Staples. Early Cyclicals, which are more sensitive to the economic cycle, have seen the greatest increase, led by Comms and Discretionary. Staples is the only sector where both internal and external sentiment has deteriorated. That seems to confirm the view captured in our survey where Staples was the least favored by investors in all backdrop (survey result HERE).
Margins within Tech remain the highest of all sectors, and profitability has been slipping some across most other sectors. The outlook for margins remain solid though. Pricing power and price sentiment both climbed during 4Q reporting and overall margin sentiment remains at higher level (HERE). For now, both earnings and margin readings for Early Cyclical sectors are mostly positive.
At the end of the report we list the stocks falling into both of our earnings season baskets. You can track the performance and constituents of those baskets on BBG (MS22BEAT Index, MS22INEX Index).
Broad Earnings Sentiment Improvement Led by Early Cyclicals: With nearly 70% of S&P companies reported, 4Q earnings are handily beating estimates. 79% of reporters have posted better than forecast EPS and the S&P has climbed 4.5% during reporting. Economic growth expectations have been revised higher as well, and inflation has remained stable. Our sentiment internal (company) and external (macro) management sentiment readings have rebounded in 4Q after a mixed start. Better macro trends are creeping into investors sentiment as well (HERE).
At the sector level, external sentiment changes over the past quarter have almost all been positive. The only decliners are Industrials and Staples. Early Cyclicals, which are more sensitive to the economic cycle, have seen the greatest increase led by Comms and Discretionary. Internal earnings sentiment changes, which are more tied to industry and company cycles, have been more mixed between Cyclical and Defensives. Staples is the only sector where both internal and external sentiment has deteriorated. That seems to confirm the view captured in our survey where Staples was the least favored by investors in all backdrop (survey result HERE).
For reported S&P earnings, y/y EPS growth has been 5.2%, led by Early Cyclicals including Communications and Discretionary. That is also aligned with their earnings sentiment readings. Energy earnings are being dragged lower by the decline in oil, and Materials are struggling as well. The bottom line is that S&P earnings continue to surprise to the upside by a wide margin.
S&P NTM EPS estimates continued to climb during 4Q reporting season as well. Again, Cyclicals, particularly Early Cyclicals have led NTM EPS growth revisions. New York Community Bancorp’s dismal earnings weighed on the overall sector and has led to Financials 4Q earnings revision dropping -18%.
Margins within Tech remain the highest of all sectors, and profitability has been slipping some across most other sectors. Tech margins are one of the reasons it remains a favorite sector among investors. Staples margins are the lowest among all S&P sectors but did increase a touch during reporting.
The outlook for margins remain solid though. Pricing power and price sentiment both climbed during 4Q reporting and overall margin sentiment remains at higher level (HERE). The latest pricing sentiment readings increase concerns about forward earnings especially for Defensives including Utilities and REITs. Materials, Technology and Discretionary margin sentiment continues to be strong, even as the broad index signaled some weakness. For now, both earnings and margin readings for Early Cyclical sectors are mostly positive.
The names reporting next week that fall into our high Quality of Earning and positive earnings sentiment basket are below. A full basket is tradable as Swap with ticker MS22BEAT Index. Historically, the basket has a higher beat percent than the S&P.
To trade on recent macro recovery, we filter the S&P names with stable/increasing internal earnings sentiment while dropping external earnings sentiment for MS22INEX Index Swap. The names in the basket reporting next week are below. Rebound of macro backdrop and earnings sentiment should support the basket recovery.
