Investors View Corporate Earnings Season as Next Test for Stocks

Q2 Results

Investors will be deciding whether U.S. stocks can maintain their current gains in the face of declining profitability as the corporate earnings season begins this week.

Economists anticipate S&P 500 businesses will post quarterly results that are down for a second time in a row. According to FactSet, first-quarter profits will decline 6.8% from the same period last year. That would be the biggest drop in profits since the Covid-19 pandemic’s beginning caused a 32% profit decline in the second quarter of 2020.

According to corporate results, Eric Gordon, head of equities at Brown Advisory, “we’re already in a recession.”

Inflation, rising interest rates, and, more recently, worries about the stability of the financial system in the wake of the two biggest bank collapses since the 2008 financial crisis, are just a few of the issues that businesses have been battling. The S&P 500 has increased 6.9% this year, though, as have American stocks.

Investors are waiting for the next set of earnings reports in order to gain insight into how much further corporate profits may decline and whether or not it would make stocks appear overpriced in comparison to their worth, despite Wall Street’s recent reduction of its earnings projections.

This week, investors will examine the quarterly financial reports of some of the biggest banks in the nation, including JPMorgan Chase & Co., Citigroup Inc., and Wells Fargo & Co. Investors will also analyse the most recent consumer and producer pricing surveys to determine whether inflation is slowing down, which will probably affect how quickly the Federal Reserve raises interest rates.

The economy continued to add jobs at a robust rate in March, according to the monthly jobs data released on Friday. This could raise investor hopes that the Fed will raise rates at its next meeting in May.

As the first group of businesses to release results, banks will set the tone early. With the instability in the financial system in March, investors are paying closer attention to the industry. A large portion of the market is watching to see if bank executives indicate any intentions to limit lending, which would have an impact on the expectation for growth across industries and potentially change the Fed’s interest-rate trajectory.

We are attempting to determine the extent to which tougher lending rules will have an adverse effect on economic growth “said Scott Duba, managing director of wealth management at Prime Capital Investment Advisers and the company’s chief investment officer. It will reveal a lot about how flexible or tight the financial situation is.”

According to Mr. Duba, his company currently favours healthcare and consumer staples sectors, which are considered defensive equities and are safe bets in case the market turns shaky.

After a strong run-up in share prices to start the year, earnings announcements from megacap technology companies now dominate the market. Results from businesses like Apple Inc. and Microsoft Corp. are particularly crucial in determining the direction of the overall stock market due to their heavy weighting in the S&P 500.

“I find it incomprehensible that tech equities are rising when earnings expectations are falling,” “according to CBIZ Investment Advisory Services’ chief investment officer, Anna Rathbun. “When earnings start to be released, I believe there will be a reality check.”

How long consumers will tolerate higher prices as businesses attempt to pass on rising costs is a key concern for investors. The S&P 500’s first-quarter revenue is predicted by analysts to climb by 1.8%, which would be the worst sales growth since the third quarter of 2020.

Some businesses are sustaining sales and earnings despite the challenges, according to early quarterly reports. Conagra Brands Inc., a food firm, declared earnings last week that were greater than anticipated, blaming price hikes brought on by inflation. While it worked through an inventory surplus, Nike Inc. reported a 14% increase in quarterly sales and increased its revenue growth target in March.

Based on the steep decline in consensus predictions, some investors claimed they were prepared for weaker results. According to FactSet, analysts sharply revised their earnings forecasts downward by around 6.2% during the first quarter. Companies now have a lower standard to meet in order to inspire greater investor confidence and spur share purchases.

“This quarter’s expectations are relatively low, “the portfolio manager at Penn Mutual Asset Management, George Cipolloni, remarked. “If you beat and provide a reasonable projection, there is a chance that your stock may rise quickly.”

According to some investors, the rather optimistic nature of the earnings forecasts for the second half of 2023 may prompt more changes on Wall Street. Analysts anticipate 1.2% annual earnings growth.

Declining profits pose the risk of making stocks seem more costly going forward in terms of company profits. According to FactSet, the S&P 500 companies are selling at a premium to the 10-year average of 17.3 of around 18 times their anticipated 12-month earnings.

“When these stricter lending requirements begin to permeate the economy, earnings expectations will need to decline, “Mr. Gordon from Brown Advisory said. The path of equities for the rest of the year will be determined by what we learn throughout reporting season about how meaningful the reset needs to be on earnings.”