Why Q1 Earnings Season Has Been 'Death By Paper Cuts'

The SPDR S&P 500 ETF Trust SPY recently hit its lowest level of 2022 this week despite overall first-quarter earnings numbers that are relatively solid. Unfortunately, Bank of America analyst Savita Subramanian said overall S&P 500 earnings numbers for the first quarter aren't as strong as they may seem at first glance, and the index is experiencing a "death by paper cuts."

The Numbers: Subramanian said S&P 500 EPS is up 11% year-over-year, exceeding consensus estimates by about 6% on the quarter. However, she said guidance updates this quarter have been the worst since the COVID-19 pandemic hit in the second quarter of 2020. As a result, Subramanian said the S&P 500 is at a high risk of significantly missing full-year consensus ESP estimates of $251. Bank of America is projecting just $230 in 2022 S&P 500 EPS with a downside of around $200 if the U.S. economy falls into a recession.

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"We see risks to 2023 earnings even under a no recession scenario. We are 8% below consensus, and see risks to earnings in Consumer Discretionary, Materials and other big-ticket exposed sectors," Subramanian said.

Hidden Weakness: Subramanian said this underlying earnings guidance weakness has been masked by the booming energy sector. Overall 2022 S&P 500 EPS estimates are up since the beginning of 2022, led by the energy sector. Consensus 2022 energy sector EPS estimates are up 62% year-to-date, while consensus EPS estimates for the rest of the S&P 500 are down 0.5%.

Benzinga's Take: Market sentiment also seems to be playing a role in S&P 500 weakness year-to-date. Bank of America reported that stock gains following earnings beats this quarter has been lower than their historical average, while stock losses following earnings misses have been larger than average.

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