Earnings Snap and Major Policy Implications

With 93% of the S&P 500 reporting earnings to date, 68% have reported a positive EPS surprise, below the 1-year average of 75%. Companies are reporting earnings 1.1% above consensus estimates, well below the 1-year average of (+6.5%) and the 5-year average (+8.6%).

Major Policy Implications

• As we’ve discussed in our sector coverage this earnings season, a consistent theme has been the reaction to major policy implications spurred by Washington. This sentiment can be linked to two marque pieces of legislation passed by Congress – the Bipartisan Infrastructure Bill and the Inflation Reduction Act.

The Bipartisan Infrastructure Bill

• Passed in Nov. 2021, the Bipartisan Infrastructure Bill, formally the Infrastructure Investment and Jobs Act (IIJA), aims to strengthen U.S. supply chains and prevent core material and logistical disruptions through $550B in infrastructure project funding.
• To date, announced and awarded funding has filtered predominantly into U.S. road and bridge infrastructure projects. That said, current totals constitute a mere 14% of the allotted funding from Congress, and commentary from recent earnings calls reflects many predicting most of the impacts will be felt in 2H 2023 and beyond.
• Following President Biden’s State of the Union address earlier this month in which he spoke to the importance of the Build America, Buy America Act (BABA), requiring all iron, steel, manufactured products, and construction materials used in covered projects be produced in the U.S., officials issued new proposed guidance to include additional construction materials. These provisions extend the purview of how BABA is implemented, closing loopholes which enabled projects to be built with foreign-made materials without waiver approval.

The Inflation Reduction Act

• Passed in Aug. 2022, the Inflation Reduction Act (IRA) aims to ease healthcare costs, reduce carbon emissions, bolster domestic energy production, and, in the process, ease the federal deficit.
• An analysis by the Congressional Budget Office estimates the bill will invest a total of $392B into clean energy and climate initiatives while delivering a net deficit reduction of $238B over the next decade through a series of additional revenue sources (e.g., 1% buyback tax) and cost savings (e.g., health care price reforms).
• During recent earnings calls, executives point to rising end-market consumer demand, liquidity benefits from the transferability of credits, as well as supply chain repositioning as a result of the legislation.
• As it relates to inflation, most estimates suggest the Act would have no meaningful effect in the near-term, though commentary throughout the Q4’22 reporting season suggests commodity inflation across sectors is softening, likely settling around the mid-single-digit range for 2023.