Amanda Agati:

In this edition of "#AddingAlpha," we take a closer look at Q1 earning season for the S&P 500, and make some observations about what it may mean for the rest of 2022.

First quarter earnings season is underway and what's really different from recent quarters is that we have to deal with negative growth rates in some sectors and industries, really for the first time in the pandemic era.

We've even had about 100 basis points of negative revisions before earning season even began.

But that doesn't mean earnings are starting to become a head wind for the market.

So let's dive right in to better understand why earnings actually remain a bright spot for markets, especially in an environment where we're searching for positive catalysts.

When you're coming off record-breaking tough comparisons from last year, by definition the math alone is going to make it very challenging in terms of a backdrop to beat this year.

Layer on top of that a dynamic of perfect stream of macro head winds, and it really makes for a much more fragile backdrop compared to just a year ago.

That's why earnings growth is so important to the path forward.

For Q1, we're looking at about 7% growth for the S&P 500, but that growth is almost entirely due to the energy sector, so it's yet another quarter of very narrowly led growth, and narrow leadership in general has been a recurring theme over the course of the pandemic.

We just haven't seen a broad based acceleration since the recovery began, it's been choppy and it's really in part what has led to a continued high volatility regime.

Just four sectors saw positive revisions coming in to earning season, and they were energy, technology, real estate, and utilities, AKA three really small sectors, and, of course, perennial tech leading the charge.

Four sectors had outright negative growth estimates to start, and they were financials, consumer discretionary, staples, and communication services.

The themes were really focused on for earnings calls and company guidance, revolve around the impacts from commodity prices in the energy complex, continued supply chain bottlenecks and disruptions, continued COVID lockdowns in Asia, any notable fallout from Russian sanctions, and of course, Fed policy tightening.

There's no shortage of material for us to be focused on this earning season.

Revenue growth is still tracking at just under 11% for the S&P 500 but margins are already near their all-time highs.

So, a key question for us is, how much more can companies continue to pass through higher input and wage costs?

Q1 is absolutely the toughest quarter of the year and will be very telling in terms of profitability and margin impacts.

With growth decelerating overall, that tail wind of margin expansion is also beginning to fade.

The good news is that so far in earning season, the beat rate is tracking about 300 basis points ahead of the long-term average, so that is really helping revisions chart a path higher.

For 2022, we're now looking at about 10% growth for the S&P 500.

Definitely a solid result, but a much more measured pace of growth than 2021's monster 50% growth year.

Revisions are grinding higher, which you really wouldn't expect to see if the outlook was materially worsening from here.

So that gives us hope that the rest of this year can chart a path higher.

While we got a substantial valuation multiple reset in Q1 with the market correction, we're now sitting at about an 18 times forward P/E, and so even at this level, the market is not priced for a major contraction in the economy, or a Fed that goes too far.

So investors really need to beware of those two major risks.

Absent a resolution in Russia/Ukraine and/or more clarity that the Fed isn't going to go too far or be too aggressive in terms of its policy stance, we still believe the solid underlying fundamentals

won't be enough to overcome the stiff head winds based on the macro backdrop in the short run.

As a result, we think the high volatility regime dominates what is otherwise shaping up to be a very positive earning season.