Q2 Earnings Better Than Feared but Dollar Headwinds Will Get Worse in Q3 - BofA

August 8, 2022 7:02 AM EDT
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Bank of America strategist Savita Subramanian took note of a better-than-expected Q2 earnings season so far with about 90% of companies already reported.

BofA’s data shows “a 4% beat at $57.74 (+10% YoY) vs. consensus’ $55.35. 68%/66%/51% of companies beat on EPS/sales/both,” which is better than the historical average.

Subramanian especially pays attention to guidance with the ratio of above- vs. below-consensus guidance standing at 1.4x. However, despite positives, the bank’s quant still sees pressure ahead given that the corporate sentiment and weak demand mentions are “at recessionary levels.”

“Labor is by far the biggest cost input, representing as much as 40% of total costs. Sticky wage inflation, especially when pricing power and demand are expected to slow will be a major headwind to corporate margins, in our view,” Subramanian wrote in a client note.

As far as the FX headwinds are concerned, the Bank of America calculated a 2ppt headwind (based on the 13% YoY rise in the USD) to sales growth, which is the biggest hit since 2015. Subramanian warns that things will get even worse in Q3.

“Assuming the current spot price for the rest of 3Q, the USD is expected to be +15% YoY, accelerating from 2Q. Sectors with high foreign exposure, Materials and Tech, are the biggest losers from continued strength in the USD.”

Interestingly, Subramanian notes that a third of Consumer Discretionary companies are yet to report, which is important given that this sector is seeing the most pressure.

“It is also the most labor-intensive sector, being challenged by sticky wage inflation. With several late reporters, 1/3 of sector earnings have yet to report and could weigh on overall S&P earnings,” Subramanian concluded.

By Senad Karaahmetovic

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