18 Jul 2022 3 min read

Earnings season outlook: what the first reports are telling us

By Tim Armitage , Patrick Greene

Early indications point to cautious guidance amid the macroeconomic uncertainty, but no big earnings downgrades just yet.


Earnings season is now upon us, which means an avalanche of bottom-up news flow in the weeks ahead.

We think the indications are for an OK season and that this won’t be an earnings season that triggers the big earnings downgrades we ultimately expect in a recession scenario.

Early reporters, companies with May quarter ends, have so far delivered pretty decent results. The general theme has been that the last three months were strong (thanks to revenue growth), forward-looking statements have been cautious (not surprising given all the macro uncertainty), but guidance has been maintained.

Managing expectations

Sell-side analysts always trim forecasts heading into earnings season, but they have been cutting less than normal this quarter. So, the messaging from companies to analysts has been less bad than normal. We read that as a sign that companies feel relatively comfortable with estimates and don’t feel the need to lower expectations ahead of results, at least not more than they normally do to make sure they can beat on the day.

We know that the level of earnings estimates always lags the market, but there can be some information in earnings revisions. On that front, however, there is also nothing to see yet. The post-recession upgrades have stopped but, for a few months now, there have been about as many upgrades as downgrades. And that’s better than the historical average of more downgrades.

Finally, we can look at earnings per share (EPS) estimate dispersion. When those ‘quick off the mark’ analysts begin to cut expectations, it typically leads to increased dispersion of EPS estimates. But so far that’s also not been the case - EPS dispersion is currently below average in nine out of 11 sectors.

Early reporters

In the tech sector, two of the early reporters, Samsung Electronics* and TSMC*, have posted good results, despite concerns from some analysts about inventory levels in the semiconductor industry.

Investors will also be watching banks to see how net interest margins perform. Historically, as central banks raise interest rates, banks have seen rising net interest margins (the difference between the interest rate charged on loans and the rate earned by depositors), with deposit rates usually lagging. However, there will also be a focus on banks’ ability to build capital, after stress tests showed limited buffers. JPMorgan* announced a temporary suspension to buybacks in their recent results because of this.

Another interesting sector to watch is housebuilders. Mortgage rates have risen a lot in the US, impacting housing affordability. Investors will be watching closely for any indications of weaker demand as a result.

A potential window of opportunity?

As noted above, earnings estimates tend to lag the market, so the results we see in the weeks ahead will reflect past conditions. But looking forward, given the forecasts from our economics team, we would expect earnings growth to grind to a halt towards the end of 2022.

Recession timing is uncertain, of course, but if the US economy goes into recession earnings will likely decline. Current expectations suggest this will happen in the second half of 2023 but faster increases in interest rates from the Federal Reserve could bring that forward.

As a result, there is a balance to be struck. Short-term earnings will likely be OK, but market sentiment is negative. Everyone is talking about a recession. That combination of short-term earnings resilience and market pessimism potentially creates a window for equities to perform well, in our view.

Sectors to watch

Taking a longer view, a decline in earnings would lead to weaker performance returns. However, not all sectors are equally affected. We expect the earnings of defensive sectors such as healthcare, household goods, food and beverages, utilities, and telecoms to hold up better than more cyclical areas of the market such as autos, chemicals, industrials, construction, travel and leisure, and basic resources. That is why our equity allocations favour defensive sectors, which we believe will provide some protection if, and when, growth slows. 


*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

Tim Armitage

Quantitative Strategist

Tim is a former musician reincarnated as a quantitative strategist, and subsequently spends more time writing code than songs these days. When not thinking about swaption strategies and risk indicators, you’ll find him running marathons, and secretly hoping there’s a day his three sons form a band that becomes the next Kings of Leon.

Tim Armitage

Patrick Greene


Patrick is a strategist within LGIM's Asset Allocation team, covering a range of asset classes. Patrick joined LGIM in 2021 from M&G, where his most recent role was in the Long-Term Investment Strategy team, covering both macroeconomic research and investment strategy. Prior to that, he was an economist at CRU, providing economic research relevant to commodity markets. Patrick graduated from Durham University with a degree in economics. He also holds an MSc in economics from Trinity College Dublin and the Investment Management Certificate.

Patrick Greene