Thursday is the halfway point for fourth-quarter earnings season.  The good news is corporate America is flush with cash.  The bad news is 2022 estimates don’t look anywhere near as robust as 2021.

The highlights so far:

Revenues are at record highs.  Corporate America is flush with cash.  “The quarter could reach $3.5 trillion [in total sales] for the first time,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told me, noting that total sales had only hit $3.0 trillion for the first time in the fourth quarter of 2020.  Dividend payouts and buybacks are also at record highs.

Corporations are beating estimates by a much smaller amount.  Companies reporting so far are beating fourth quarter estimates by only 4.6%, according to Refinitiv, far below the 16% beat in the prior five quarters.

Estimates for 2022 are not getting raised as much as 2021.  Earnings estimates for the first quarter have been declining, and they have risen slightly for the second and third quarter. 

Profit margins are lower, but not by much.  The second quarter of 2021 saw record operating profit margin of 13.5% in the S&P 500, as many corporations benefitted from higher revenues and lower costs from labor, real estate, and more use of technology.  That has reversed somewhat:  Corporations are reporting paying more for labor and commodities, which has brought operating profit down to 12.7%, lower but still a healthy level.

Stocks trade off of future earnings and dividend estimates, so Wall Street pays far more attention to guidance than reported earnings. 

Looking at guidance for 2022, earnings are expected to hit another record in 2022.  The bad news:  earnings are expected to rise by only 8%, a far more modest rise then 2021’s 47% rise in profits.

Rising earnings estimates are one of the biggest determinants of stock prices.  So why aren’t estimates being raised much in 2022? 

Nick Raich, who tracks corporate earnings at the Earnings Scout, tells me there is a wide range of earnings outcomes possible this year, depending on the extent of the Fed’s rate hike campaign and on the inflation story, which is still playing out.

That is causing uncertainty, which is reflected in the up-and-down earnings estimates for 2022.

“The first quarter estimates declining reflects the reality of supply chain and inflationary problems, the second and third quarter numbers rising are wishful thinking,” he told me.

Savita Subramanian at Bank of America Securities agrees:  “Analysts are penciling in a temporary blip in 1Q amid Omicron,” she said in a recent note to clients.

But corporate America seems concerned that inflation will be lingering much longer than expected.  Here is a typical comment from 3M: “We are seeing inflation has gone downstream now. So you’re seeing it in much more places than you had seen it before.”

Meta (Facebook) made similar comments when reporting earnings after the close last night:  “We’re hearing from advertisers that macroeconomic challenges like cost inflation and supply chain disruptions are impacting advertiser budgets,” CFO Dave Wehner said in a press release. 

Subramanian also agrees that there is a lot of “wishful thinking” around profit margins, noting there is increasing doubt that corporations will be able to keep raising prices to offset higher costs, particularly labor costs:   “What’s harder to swallow is analysts expect margins improving to new highs by 2Q…despite a step-up increase in wages.”

The Fed’s rate-hike calendar is a second wildcard that Raich believes has not been fully priced into the market.

“The bond market may be pricing in four or five price hikes, but the stock market has not fully priced that in,” he told me.  “Many of the analysts seem to believe that the Fed is talking tough but will not follow through with four or five hikes.”

The recent rally, and the fact that 2022 earnings are not being raised aggressively, has pushed the S&P into the expensive realm once again, now trading at 20.4 times 2022 earnings, according to Refinitiv.  That is well above the historic range of 15-17 times forward earnings estimates.

That, according to Peter Tchir at Academy Securities, is a warning sign.

“When you see high valuation companies miss [like Paypal or Meta], they get hammered,” Tchir told me.  “That tells me that large components of the market are still overvalued.”

What will it take to start moving earnings estimates higher?  Tchir cited a bottom in China, and a waning of omicron which will help ease supply chain and inflation pressures.  That would cause more jobs to be taken up, which will help support strong spending.

Regardless:  “You definitely have a headwind on asset prices from the Fed, and there is no way to get around that for the next few months.”