Many expected the worst from Q2 earnings but as it turns out, it hasn’t been all that bad, with the S&P500 set to report around 9.2% earnings growth – and so far, 77.5% of companies have beaten expectations. Here are the five key takeaways from Q2 earnings season.
1. Travel is essential, and consumers aren’t staying inside
Disney’s better-than-expected results add to what has already been a strong earnings season for travel and leisure companies. Travel spend is robust, and after years locked inside, consumers aren’t ready to give up on this luxury.
Booking Holdings and Expedia Group saw huge earnings growth rates of 848.2% and 273.5%, respectively, obviously given a weak year-over-year comparison. On top of this, Airbnb also pointed towards record revenue guidance in Q3 and is already seeing higher bookings and revenue than in pre-pandemic times.
This also helped American Express and Visa this earnings season as consumers continued to spend amid the rise in the cost of living. Additionally, with the latest US inflation reading likely showing that inflation has peaked, things look positive for the travel and leisure sector.
2. A recession isn’t unavoidable
Recession risks have climbed throughout earnings season – but there were strong signs that it’s not all doom and gloom. First, consumers are still spending despite weak consumer confidence and inflation is hopefully starting to cool.
The 2022 profit margin estimates have dropped from 13.2% at the start of this year to 12.8%, a downgrade but not exactly horrific. Most companies cited recession risks but suggested that a slowdown was more likely, and those companies that have reduced their outlooks were doing so modestly.
3. Investors are optimistic
There is optimism amongst investors that earnings can weather this toxic mix of inflation, hawkish central banks and a potential recession, and it’s put the wind in the sails of US markets. Since early July, the S&P500 has rallied 10 percent as big tech handed down earnings results that were healthy and sturdy despite the current macro environment.
This has been a sign to many investors that staying invested in markets over difficult environments can be rewarding. Bear markets are challenging, but they don’t last forever, and after all, bull markets are built on the shoulders of bear markets.
As eToro’s recent research has shown, 93 percent of Australian retail investors held their positions or bought the dip throughout the second quarter, and we can expect this resilience to continue throughout Q3.
4. Banks missed the mark, but fundamentals were solid
Overall the headline bank earnings were worse than forecasted, but this was expected given the increased loan loss reserves. However, fundamentals were strong, net interest margin has improved across every bank, and loan balances were higher.
On top of this, whilst the banks have prepared for the worst, the number of consumers defaulting is lower than pre-covid, according to JP Morgan. Moreover, these banks all passed the annual stress tests showing they can weather a downturn.
Overall, the banks came out looking pretty healthy, and we expect to see an increase in dividends in the back end of 2022.
5. Supply chain disruptions could be behind us
Over the past two years, supply chain disruptions have caused havoc to almost all companies – but the worst could be behind us.
Most companies changed tact from worrying about supply chains to touting inflation as the biggest fear. However, Elon Musk and Tesla openly said that they believe the worst of their supply chain issues is likely behind them. Musk said that he sees signs that commodities prices are on a downward trajectory and supply chains are normalising.
With lockdowns in China coming to an end and some reprieve in Ukraine with Russia letting ships deport, it seems that companies may have less to worry about on the supply chain front moving forward.