The 4Q22 earnings season continues to highlight the slowing economy’s impact on corporate profitability, especially via margin compression. Revenues remain robust for now, but earnings contractions are proliferating across sectors. As the economy slows further, margin preservation with revenue growth will be increasingly desirable, and defensive and high-quality investments should be better positioned to endure the volatile period that is likely ahead.

S&P 500 revenue and earnings consensus estimates
January 2022–present

A graph comparing S&P 500 revenue and earnings from January 2022 to present.

Despite increasing revenues, rising business costs are dampening earnings and compressing margins. Note: 12-month forward consensus estimates curated by Bloomberg Estimates (BEst). Source: S&P Dow Jones, Bloomberg, Principal Asset Management. Data as of March 6, 2023.

Despite 4Q22 S&P 500 earnings beating expectations, profitability is receding, and further forward estimate markdowns should be expected. A slowing economy, rising interest rates and labor shortages, coupled with 2022’s renewed U.S. dollar strength and energy price spikes, will continue to weigh on 2023 earnings growth.

Breaking down 4Q22 earnings:

  • 4Q22 earnings contracted to -3.2%, deteriorating from 4.4% growth in 3Q22. With revenue growth of 5.8%, deepening margin compression is evident, as firms are finally feeling the effect of rising costs. Only energy and industrials grew profits in 4Q22, while all but two sectors (materials and technology) grew their topline.
  • In the last six months, S&P 500 forward earnings were revised down by -4.6%. Earnings revisions now approximate levels approaching the 2015-2016 earnings recession, which ultimately delivered five straight quarters of earnings contraction.
  • The energy sector continues to be supportive (S&P 500 ex-energy earnings contracted -7.4%), however, it too is weakening. In the last six months, energy sector forward revenue and earnings were cut by -7.0% and -10.5% respectively—the worst downgrades since the pandemic.
  • Only two sectors, staples and utilities, have exhibited positive revisions trends in both revenue and earnings in the last 12 months. Their pricing-power and defensive quality should better withstand a slowing economy.

Amid weaker earnings and a slowing economy, investors should prioritize margin resilience. Corporates that are able to preserve margins and topline growth via pricing-power (i.e. defensive and high quality) will likely become increasingly attractive into 2023.


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