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Market Updates

September 15, 2022

Market Snapshot: Large Cap Growth Estimates Fall; Small Cap Estimates Remain Resilient

  • S&P 500 earnings growth expectations for 2022 have fallen from 10.3% to 8.7% over the past quarter, although still reasonable given recessionary fears. The slowest anticipated growth — and bulk of this downward revision — has been in the largest and growthiest names. The top five companies in the index, all technology companies, are now expected to see an earnings contraction this year of -5.6% versus a projected -0.8% three months earlier (Exhibit 1). Outside of these top five names, earnings are projected to grow 11.2% versus the 12.2% estimate last quarter.
  • Small caps, however, seem to be showing more resilience, with small cap earnings rising on average in the past three months. EPS diffusion (the percent of analysts raising versus lowering estimates) for the Russell 1000 index stands at 44% (as of 9/13/2022). This is 6% below the neutral level of 50%, implying that more analysts are cutting, not raising, EPS estimates in the past three months. Revenue diffusion is also at 44% for large caps, although in the small cap Russell 2000 index this trend is reversed, with EPS diffusion at 53% and revenue diffusion at 51%, suggesting more analysts are raising EPS estimates for this asset class. The Russell 2000 is also expected to more than double its earnings this year as it recovers from the pandemic, exceeding the high-single-digit growth expected in large caps.
  • A potential reason for this divergence is cyclical weakness in technology-oriented sectors. The Russell 1000 and S&P 500 indices each have over 34% in Tech and Communications, more than double the Russell 2000, which has about 15.3%. International revenue of the S&P 500, at 40.3%, is nearly double that of the Russell 2000, at 21.0%. Growth stocks have even higher foreign revenues (44.4% for the Russell 1000 Growth, per FactSet). This pronounced foreign revenue exposure for large cap, growth-oriented stocks may hamper earnings estimates, given the looming global slowdown and recent dollar strength. Active managers may be better suited to adjust for these earnings headwinds and position their portfolios accordingly.

The views expressed represent the opinions of certain GIM portfolio managers as of September 15, 2022, and are not intended as a recommendation of any security, sector or product, and any security identified herein may or may not have been bought, held and/or sold by GIM-managed portfolios. Any opinions or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable, but accuracy is not guaranteed. Future developments (including performance) may differ materially from expectations and projections noted herein due to various risks and uncertainties and changes in underlying assumptions.