Analysts Begin To Lower Earnings Estimates for 2022 Year

By Tom Burnett CFA
In the latest FACTSET report from January 7, 2022, the consensus estimates for the S/P 500 Index earnings growth in 2022 are decidedly lower than for the 2021 year. While final 2021 results are not yet available, the expected information now looks like earnings growth of 45% and revenue growth of 16%, well above the Covid-19 negative impact on the 2020 results. For 2022, however, the current earnings growth projection is 9.4% with revenue growth down to 7.6%.
Looking at the actual estimates for 2021 and 2022, we see 2021 earnings of $205, up sharply from the $140 reported for the 2020 year. The projection for 2022 is a robust $223 estimate, but the growth figure of 9.4% is well down from the 2021 growth achievement. It is important to note that the 2022 projection does not include the expected negative impact of the Federal Reserve’s anticipated moves to raise interest rates. This move to higher rates will likely slow the economy and squeeze corporate profits. Accordingly, we expect the projections for 2022 earnings to begin to be reduced as the interest rate picture changes to a more negative backdrop for the economy and the corporate earnings performance.
With the S/P 500 Index trading at the 4,600 level, the price-earnings ratios on 2021 and 2022 earnings remain historically high. Looking at the 2022 projection of $223, for example, we calculate an earnings multiple of 20.6x. The FACTSET average multiples for 5-years (18.4x) and ten- years (16.6x) are well below the current multiple for 2022. Investors need to remain alert for possible reductions in the 2022 consensus earnings projections as the expected higher interest rate movements work their way through the economy.
Tom Burnett CFA is Director of Research