Q2 earnings preview: rosy expectations and energy focus Q2 earnings preview: rosy expectations and energy focus Q2 earnings preview: rosy expectations and energy focus

Q2 earnings preview: rosy expectations and energy focus

Equities 7 minutes to read
Peter Garnry

Head of Equity Strategy

Summary:  Global earnings are down 10% from the peak and we expect more weakness during the Q2 earnings season as companies are still under margin pressure from higher energy prices, rising wages, supply chain disruptions, and high logistics costs. Our key focus during the earnings season is the energy sector which still enjoying big earnings growth due to rapidly rising energy prices. In today's equity not we are also zooming in Micron Technology's disappointing outlook and what it means for the technology sector.


Earnings expectations are not reflecting reality

The Q2 earnings season starts in two weeks and will likely be dramatic following the worst first half of a year in US equities since 1970. Earnings in the MSCI World Index are down 10.8% since the peak in Q2 2021 and we expect earnings to continue lower in Q2 2022 as the main theme remains margin pressure driven by higher energy prices, elevated logistics costs, wage gains, disrupted supply chains driving up inventory levels, and an economic slowdown due to lower consumer confidence. EPS expectations are still too high with MSCI World EPS estimate 12-month forward being $176.31 which is 14% higher than the current earnings. With margin pressure coming no matter whether the world slips into a recession or inflationary pressures persist due to commodity prices and wages it seems unlikely that these estimates can be met by companies. Equity valuations have come down but are still above their long-term average which is still out of touch with where financial conditions are and thus underscoring that expectations remain too elevated. This increases the downside risks going into the Q2 earnings season.

We expect sectors such as communication services, information technology, consumer discretionary, industrials, utilities, and real estate to be the hardest hit sectors while we expect strong results from the materials, energy, consumer staples, and health care sector. Financials are likely mixed due to a mix of factors such as economic slowdown and widening credit spreads, while on the positive side interest rates are coming up and thus also net interest margin.

The energy sector is our key focus during the earnings as energy prices and Chinese equities have been the best two pockets in financial markets in Q2. Earnings in the global energy sector have come back to the levels before the energy sector crisis of 2015 and despite special taxes being applied on the sector in various countries, we expect profitability to rise in Q2 and attract more inflows as the global energy sector remains very cheap relative to cash flows and dividends.

Earnings in MSCI World
Earnings in the MSCI World Energy Index
Equity valuation

Micron sends a warning signal for investors

Micron, the memory chip manufacturer, put out a disappointing outlook last night with Q4 revenue guidance (ending 31 August) of $6.8-7.6bn vs est. €9.1bn expected driven by material weakness in the global smartphone and PC market. Micron is expecting 130mn less smartphone units this year than previously estimated and the company also expects the PC market to decline by 10% this year. Shares were down 2% in extended trading reflecting that the market had already anticipated the majority of the weakness in the guidance underscoring that it is sell-side analysts that are way behind relative to reality.

Micron’s outlook is also reflecting that the technology sector has now moved on to cut capital expenditures. The sector started cutting down on marketing expenses and then went on to lay off people, with layoffs accelerating in the past three months, before moving on to R&D and now also capital expenditures. The weak outlook is also well aligned with the low consumer confidence figures we are observing which are feeding through to consumer demand.

Micron Technology weekly share price | Source: Saxo Group

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.