While global financial markets are reeling from the latest geopolitical events in Eastern Europe, earnings season for Q4 2021 is quietly drawing to a close, with over 90% of companies in the S&P 500 having already reported. The preliminary results, which at this point are unlikely to change much, show earnings 29% higher than the same quarter a year ago, which is almost 6% higher than analysts were expecting. From a sector perspective, late cyclicals such as Energy (N.M.), Industrials (102.9%) and Materials (56.8%) contributed the most to the 2021 earnings surge, staging an impressive rebound after a disappointing 2020. Meanwhile, defensive sectors such as Utilities (7.1%) and Consumer Staples (6.2%) lagged behind. Going forward, analysts expect the earnings expansion to last for at least another two years, with S&P 500 earnings per share growing from $208 in 2021 to $225 in 2022 and $248 in 2023. This implies a slower but much more sustainable growth rate of around 9% per year.
As terrible as the events currently unfolding in Ukraine are from a humanitarian perspective, they are unlikely to affect the earnings outlook for the S&P 500 in a meaningful way. First of all, Russia and Ukraine are two very small players in the global economy. Based on 2020 GDP numbers provided by the World Bank, Russia contributes 1.75% to global GDP while Ukraine contributes only 0.2%. As such, even a severe and prolonged economic recession in these two countries would barely put a dent on global GDP, which is expected to grow by 4.1% in 2022. The impact for S&P 500 companies may turn out to be even smaller given the relatively limited ties between the US and the two Eastern European economies. Out of the 462 companies of the S&P 500 that have reported Q4 2021 earnings so far, as many as 18 have mentioned Ukraine on their earnings call. While that is the highest number since the peak of 40 in Q1 2014, it still amounts to less than 4% of companies in the index. By contrast, 72% of S&P 500 companies have cited inflation on earnings calls over this same period. The relatively small number of S&P 500 companies mentioning Ukraine is explained by the limited revenue exposure of these companies to Russia and Ukraine. According to FactSet, the combined revenue exposure of S&P 500 companies to Russia and Ukraine amounts to about 1%. Consumer Staples is the S&P 500 sector with the most exposure, with about 1.5% of the sector’s revenue last year coming from Russia. For most S&P 500 sectors, exposure to Russia and Ukraine is negligible.
 Earnings growth not measurable due to earnings being negative for this sector in 2020. Sales for the Energy sector grew 91.5% in 2021
Sauro Locatelli CFA, FRM™, SCR™
Director of Quantitative Research
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