Mixed Earnings Meet Market Rally: A Stock Investor’s Take

As fourth-quarter earnings rolled in with mixed results, the stock market opened the year in rally mode. Carrie King, Global Deputy CIO of BlackRock Fundamental Equities, weighs in with three observations for stock investors.

1. Inflation’s toll on corporate profits

Margins were the big concern leading into the Q4 earnings season as still-high inflation threatened to erode company profits. Strong post-pandemic consumer demand and limited supply had so far allowed companies to pass on higher input costs. But household spenders have their limits and inventories have swelled. Fourth-quarter results showed consumers balked at higher prices. Combined with elevated inventories at retailers, this painted a challenging picture for sales.

Overall, we observed the expected drop in margins, with the S&P 500 Index’s aggregate operating margin on a step decline since mid-2022. The current level is still above the 12.5% average of the past 30 years, but margin degradation shaved 10 percentage points from S&P 500 earnings growth in Q4, resulting in a mid-single-digits earnings decline.

Margins were little problem for the energy sector, which saw operating income grow more than 50% versus Q4 2021. Profit margins for energy companies currently stand at a historical high, having notched their fastest rebound from trough levels in 30 years. See chart below. We continue to see opportunity in the energy sector even after stellar performance in 2022, but stock selection will be more important now.

Energy sector margins at an all-time high
Aggregate operating (EBIT) margins, 1994-2023

Source: BlackRock Fundamental Equities, with data from Refinitiv, Feb. 14, 2023. Aggregate EBIT (earnings before interest and taxes) margins are shown for the trailing 12-month period for the energy sector within the S&P 500 Index. Indexes are unmanaged. It is not possible to invest directly in an index.