Evan Frazier, CFA, CAIA
Senior Research Analyst
While overall fundamentals for U.S. equity benchmarks have remained mostly resilient this year amid a painful repricing of risk assets, earnings growth has actually been concentrated in just a few areas of the market. The blended year-over-year earnings growth rate for the S&P 500 index during the third quarter of 2022 is 2.2% (with roughly half of companies reporting at the time of this writing), though only four sectors of the index have reported growth in earnings for the period. The Energy space stands out especially among these sectors, with its earnings up a massive 134% year-over-year amid strong demand for natural resources and continued commodity price inflation. Were the sector to be excluded from the S&P 500 index, earnings for the benchmark would be down 5.1% on a year-over-year basis, despite the fact that Energy accounts for less than 6.0% of the index. This trend is expected to continue into the fourth quarter, during which total earnings growth for the index is expected to be roughly 0.5%, with a decline of 3.5% excluding the Energy sector. For the full calendar year, S&P 500 index earnings are expected to grow 6.1% and decline 0.6% without Energy stocks.
Examining data below the index level is always important when assessing the health of equity markets and company fundamentals. To that point, simply looking at earnings figures for the S&P 500 index in aggregate obscures the fact that growth-oriented spaces of the benchmark like Communication Services and Information Technology, which are expected to post year-over-year earnings declines of 22.2% and 2.1% in the third quarter, respectively, are experiencing significant headwinds amid ongoing interest rate and inflationary pressures. These trends, however, are expected to reverse beginning in the second quarter of next year when, against tough compares, the Energy space is projected to become a detractor to overall earnings growth for the S&P 500 index while the rest of the benchmark grows earnings at a positive rate. With all of this in mind, investors should continue to employ a prudent approach to diversification across asset classes, geographies, and economic sectors, which will help position portfolios for success as market leadership rotates.
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