Q2 Earnings Season: Energy Likely Limited Downside; Here Are The Leading And Lagging S&P 500 Sectors

The second-quarter reporting season is upon us, and the second quarter has been a tricky one for companies to navigate. COVID lockdowns in China – a nation often called the "world's factory," the war in Ukraine and skyrocketing inflation served as recipes for a looming disaster.

Profit Slowdown In The Cards: The year-over-year profit growth of S&P 500 companies will likely decline to 4.3%, the slowest since the 4% growth in the fourth quarter of 2020, Factset said in its weekly "Earnings Insight" report.

Thus far, S&P 500 companies issuing negative earnings per share guidance have outnumbered those issuing positive EPS guidance by more than two times.

Reflecting the slowing profit growth, the 12-month forward P/E ratio for the S&P 500 is 16.3, lower than the 5-year average of 18.6 and the 10-year average of 17.

Revenue growth of S&P 500 companies is estimated at 10.1% compared to the year-ago period.

Potential Sectoral Winners & Losers: Five of the 11 S&P 500 sectors are expected to see their profits grow from the year-ago period, according to FactSet. The energy and industrial sectors are expected to fare better than the rest.

Six sectors are forecast to see profit declines, led by the financial sector.

Related Link: Tuesday's Market Minute: 2Q Earnings Season Kicks Off With PEP, CAL, JPM, MS, UNH

Profit Growth (Y-o-Y) of S&P 500 Sectors

Q2 To Mark Bottom? Factset expects profit growth to accelerate to 10.2% in the third quarter before moderating to 9.4% in the fourth quarter. For 2022, the firm estimates profit growth of 10%.

Comerica chief investment officer John Lynch, however, is not that optimistic. The guidance issued by companies, according to the analyst, will reflect the impacts of inflation, slowing growth, monetary policy, and the war in Ukraine.

"We believe each of these areas will weigh on sales and margins in the coming quarters, suggesting consensus estimates are too optimistic going forward," Lynch said.

Lynch expects S&P 500 profit to come in at $225 in 2022, lower than the consensus forecast of $230. The 2023 profit estimate of the analyst is at $237.50, also lower than the consensus of $250.

"The reasons for our caution on EPS growth include the impact of inflation and monetary policy on economic activity, poor confidence surveys likely leading to less consumption and business investment affecting revenues, as well as the hit to margins given higher costs for energy, labor, and debt servicing," Lynch said.

The SPDR S&P 500 ETF Trust SPY ended Tuesday's session down 0.88% at $380.83, according to Benzinga Pro data.