Here's Why There's Downside Risk To S&P 500 Earnings In 2022

Second-quarter earnings season was surprisingly strong, but Bank of America analyst Ohsung Kwon says the next few quarters of earnings could get increasingly difficult.

The Numbers: S&P 500 EPS beat consensus analyst estimates by 19% in the second quarter, well above the average 2% quarterly beat from 2000 to 2019. However, Kwon's already starting to see evidence that inflation has flipped from an earnings tailwind to a headwind as the economy deals with labor and supply chain issues.

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Analysts are expecting S&P 500 EPS growth of 17% in the third quarter relative to 2019 levels, down from 27% two-year growth in the second quarter. Kwon is targeting 46% year-over-year earnings growth for the S&P 500 in 2021. But looking ahead to 2022, his $215 EPS estimate represents only 5% growth. It's also below the consensus earnings estimate of $220, and Kwon said there are plenty of risks that earnings growth will be even lower in 2022.

Earnings Pressures Ahead: The combination of slowing sales growth and rising wages could pressure margins in 2022. In addition, Kwon said it may be difficult for companies to pass higher costs on to consumers if consumer trends soften in coming quarters.

Another major risk factor for earnings in 2022 is tax hikes, which Kwon said could potentially drop earnings growth to zero next year.

“An infrastructure bill could provide some lift, but the hit from taxes will be direct and immediate, whereas infrastructure benefits will be spread out over time,” Kwon wrote in a note.

Benzinga’s Take: The S&P 500’s forward earnings ratio of 19.9 is already near its highest levels since the dot com bubble back in 2000. If 2022 earnings fail to live up to expectations, the SPDR S&P 500 ETF Trust SPY could be in for a significant correction at some point.