Quarterly Financial Report under pressure of inflation and interest rates

October and November were busy for the financial community as listed companies presented their financial statements for the third quarter of the year, the period between early July and the end of September. How did the hot season go for the business of listed companies?

It is difficult to answer unequivocally because 2022, a very eventful year, saw companies in certain sectors grind out a mountain of revenues and profits while companies in other sectors, on the other hand, struggled not a little due to a mix of concomitant factors: rising interest rates, slowing consumption, inflation, and warnings of a possible recession, at least in Europe.

 

The best financial statements were undoubtedly presented by energy companies.

"The energy sector was the largest contributor to earnings growth in the S&P 500 index with profits up 46.9 percent as a result of the movement in oil prices, which averaged +30 percent this quarter compared to the third quarter of 2021," says Corrado Cominotto, head of Active Asset Management at Banca Generali.

On the opposite side, Big Tech, the large technology corporations listed on the U.S. Nasdaq list, suffered heavy declines in the market just after the presentation of their quarterly accounts.

Meta, the company founded by Mark Zuckerberg that controls the world-famous social networks Facebook and Instagram, suffered a thud a couple of weeks ago after reporting a 52 percent drop in net income compared to last year's third quarter. Also struggling was the stock of e-commerce giant Amazon, which reported quarterly net income down 9 percent year-over-year and heralded below-expected revenues for the next quarter as well. The tune does not change when looking at data from Alphabet, the holding company that controls the Google search engine and which, between July and the end of September, saw its net income drop to $13.9 billion from $18.9 billion a year ago.

"In the U.S.," adds Cominotto, "earnings appear to be starting to be affected by the central bank's sharp rises, although the market has also been up in this geographic area in recent weeks. More specifically, year-on-year growth for the quarter stood at +2.2 percent (lowest figure since the third quarter of 2020) with 69 percent of companies beating analysts' estimates." This figure is lower than the average for the past five and 10 years in which companies beat analysts' estimates by 77 percent and 73 percent, respectively. There are also some differences at the sector level compared to Europe with financial stocks failing on average to beat estimates. Good results, on the other hand, for the energy and pharmaceutical sectors.

Banks also showed strength in their quarterly reports. Nevertheless, in recent weeks Moody's has decided to lower the outlooks on banks in several European countries-Italy, the Czech Republic, Germany, Hungary, Poland and Slovakia. Weighing in are the energy crisis, high inflation and rising interest rates that weaken economic growth, affecting the creditworthiness of many businesses and households, causing an increase in bad loans. However, the continuation of the rate hike phase by the ECB, without this causing a very sharp recession in the economy, would be the ideal scenario for the banking sector, considering also that the sector's stock prices are at an all-time low in terms of undervaluation compared to the general market.

Overall Cominotto believes the European quarterly season was solid with earnings growth estimates beaten in 48 percent of cases and missed in 27 percent (net +21 percent). "On average, earnings were beaten by 7.4 percent," says Banca Generali's head of Active Asset Management, who adds, "at the sector level the best results once again came from energy and financial stocks, while below average real estate, communications and industrials. Growth for the quarter as a whole for the Msci Europe index stands at +25.9% year-on-year with energy among the best sectors with +148% compared to technology, which is essentially unchanged (-1%) this quarter. Regarding sales, the average European year-on-year growth stands at +23%."

Geographically, Italy ranks second as the number of positive surprises in quarterly results with companies beating estimates in 65 percent of cases, behind only the United Kingdom at 90 percent. Bringing up the rear is Switzerland with more companies having negative surprises than those with positive surprises (-15%). Value stocks beat estimates twice as often as growth stocks while large caps beat estimates three times as often as mid caps.

Year-over-year earnings growth for this year is expected at +10% globally, +6.2% in the United States and +18% in Europe. The price/earnings ratio is still favorable for the Eurozone with multiples of 11.6 times compared to 18 times in the United States.