The S&P 500 (SP500) companies are on track to potentially set a new sales record in the third quarter, though that may be due to higher prices rather than more products sold, according to a report released by S&P Dow Jones Indices.
Businesses across sectors have increased their prices to combat rising costs as inflation has soared. While consumers have generally accepted it, firms are also bracing for a pullback in their spending as the Federal Reserve aggressively hikes interest rates.
The report estimated that Q3 2022 overall was expected to post an 11.9% gain over Q2 2022 and a 0.8% gain over Q3 last year. Of the 276 constituents of the benchmark index that announced results in October, 191 beat estimates. The beat rate of 69% was near the two-thirds historical average.
“With 53% of the issues and 70% of the market value reported, Q3 2022 earnings are coming in better than expected (but still not good) and significantly better than the whispered expectations,” S&P Dow Jones Indices senior index analyst Howard Silverblatt said in the report published on Wednesday.
The stronger than anticipated earnings performance was one of the factors that contributed to the S&P 500 (SP500) rising about 8% for the month of October, a strong rebound for the index after it had put up its worst monthly showing since March 2020 in September.
“The S&P 500 traded on better-than-expected earnings—not good ones, but better than expected—as the whispered concern over a steep earnings decline and dire Q4 predictions did not materialize,” Silverblatt said.
According to the report, operating margins for Q3 2022 were expected to jump to 11.93% versus 10.86% in Q2 2022. The average since 1993 was 8.26%, and the record was 13.54% in Q2 2021.
JPMorgan’s Bram Kaplan pointed out the outsized contribution of the Energy sector in the earnings growth.
“Energy, Industrials and Discretionary continue to report strong growth, while Materials, Financials and Communication Services remain laggards. While S&P 500 y/y earnings growth is +2%, this is mainly being driven by Energy (which saw 136% EPS growth y/y); ex-Energy, earnings have fallen y/y by 6%,” Kaplan said in a note on Friday.
Commodity, oil and gas prices have soared amid Russia’s war with Ukraine and have fueled inflation globally. It has also led to major U.S. oil companies reporting bumper quarterly results. ExxonMobil (XOM) and Chevron (CVX), the two largest producers in the country, amassed a combined $178B in revenue and $31B in profits.
The Energy sector was the best performing one among the 11 S&P sectors in October, adding 24.84%, well above its three-month average gain of 15.21%.
The earnings season is set to slow down next week, with results expected from 12% of Russell 1000 members representing just about 4% of the index market cap. Retail companies also have their reports coming up, with investors and analysts closely watching out for their comments on the state of consumer spending and forecasts for the crucial holiday sales quarter.
Along with better than expected earnings season, the S&P 500’s (SP500) ~8% monthly gain for October was fueled by hopes that the Federal Reserve would slow down its pace of rate hikes. In the past week, Fed chair Jerome Powell did point to smaller hikes, but also indicated a higher terminal rate than earlier expected, a message the market registered as not dovish enough.
“Historically, the S&P 500 gains 57.4% of the time for October, with an average gain of 4.18% for the up months, a 4.67% average decrease for the down months and an overall average increase of 0.46%,” Silverblatt noted in the S&P Dow Jones Indices report.
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