Earnings season takeaways, and the tech crunch

May 03, 2022 | The Simbul-Lezon Wealth Management Group


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This week we discuss takeaways from the earnings season which is at the halfway mark, and provide our thoughts on the technology sector which has been in the spotlight.

It has been a challenging few weeks for global equity markets, with most having been relatively weak of late. There’s no one factor to blame, though inflationary pressures and the implications for central bank interest rate policy remain core issues. There are other challenges too, but in the interest of time, we’ll save those for another day. Below, we share some thoughts on the first quarter earnings results which are now about halfway complete.

Prior to the beginning of the reporting season, the number of companies that had issued negative preannouncements – announcing results ahead of when they were expected to report – exceeded the number of companies reporting positive preannouncements by a wide margin. As a result, investors were quite cautious heading into the season, believing that companies were witnessing deteriorating demand, or rising costs, or worse yet, a combination of both.

Fortunately, the results reported thus far have been somewhat reassuring. Earnings growth for the broader developed markets is now expected to be over 10%, nearly double the original estimate at the start of the reporting season. Moreover, some of the upside to forecasts has been driven by margins, suggesting cost pressures have not been as severe as expected, at least not yet. Nevertheless, there are clearly some industries where labour, commodities, and other inputs are either in short supply or witnessing meaningful pricing pressures. This has led some companies to reduce their guidance for future earnings. But, on average, the results suggest that companies are still seeing decent levels of demand, particularly from consumers, and are finding ways to navigate through the cost pressures with a degree of resiliency.

The Technology sector is worthy of some discussion. Investors have been anxious about this cohort given its significance in the global market – it is the biggest sector and home to some of the largest stocks in the world. The group broadly benefitted from the global pandemic, with consumers and businesses spending more on hardware, software, and services for some time. As a result, the earnings and stock prices of many companies across the industry appreciated remarkably in recent years.

This year has been a starkly different experience. The sector has been among one of the weaker performers, partly in anticipation of a moderation in earnings growth. That has indeed been happening with the pace of growth nearing the average of the broader markets. On its own, it is a reasonable figure. But, it is a far cry from the 40% earnings growth witnessed at this point last year.

There is another important factor pressuring the technology space: anticipation of higher interest rates. Stock prices tend to be driven by a discount rate that is applied to a stream of future earnings, cash flows, and dividends. The rate that is used is heavily influenced by the level of interest rates. All things equal, a higher rate results in lower prices, and vice versa. Higher growth stocks, like some of those in the technology sector, are particularly sensitive because of the anticipated trajectory of their longer-term cash flows. As a result, it’s not surprising to see technology stocks under pressure in a year when bond yields have been rising and central banks are expected to raise rates rather forcefully.

Overall, investors should be comforted to some extent by the earnings season that has unfolded thus far. It suggests the operating environment remains reasonably healthy from a demand perspective. Nevertheless, the results have not been enough to offset the myriad of macroeconomic and geopolitical issues that continue to confront investors.

Should you have any questions, please feel free to reach out.


Your investment team

Marita Simbul-Lezon
marita.simbul-lezon@rbc.com
905-738-3244
Mary Rose Simbul
maryrose.simbul@rbc.com
905-738-3255
George Tsolakidis
george.tsolakidis@rbc.com
905-764-4846
Scott Donovan
scott.donovan@rbc.com
905-764-3283