2Q22 earnings season has been generally positive, alleviating investors’ immediate concerns of inflation’s effect on corporate profitability. However, the macroeconomic backdrop is still likely to deteriorate further, only adding to concerns around future challenges to corporate margins and sustainable profitable growth.

The second quarter earnings season is all but complete and top-line results have generally surprised to the upside. However, a closer look reveals several pockets of weakness.

S&P 500 earnings growth stands at 8.8%, slowing from 11.4% in Q1. Also, 78% of earnings beat expectations and were 6% above estimates. The sectoral breakdown, however, reveals index strength was driven mostly by the energy sector.

Energy, benefitting significantly from elevated oil prices, had the highest earnings growth of any sector at 296.8%. Excluding energy, EPS growth was outright negative at -1.8%. Industrials growth was strong at 31.5%. By contrast, financials, challenged by market volatility and elevated interest rates, were a much weaker performer, with -19.1%. Consumer discretionary, reflecting consumer inflation concerns and demand pay-back, declined by -12.6%.

Defensives were mixed, as healthcare led with strong pricing-power with 8.6% growth. Real estate grew by 13.0%, reflecting market under-supply and upward revaluations. Staples were challenged in passing costs to consumers and grew 1.8%, while utilities, burdened with higher energy costs, shrank by -3.7%.

Additionally, embedded in company earnings releases were multiple mentions of challenges to growth—and since overall revenue growth (13.7%) was stronger than earnings, it confirms the growing cost pressures.

While earnings season has been positive, persistent challenges indicate an increasingly difficult operating environment, likely limiting profit persistence in the second half of the year.