The Earnings Season Approaches, What Does It Mean for the Stock Market?

Stock Market

In the second part of the year, the stock market and weak investor sentiment will soon face their first major test. In the coming month, a slew of earnings reports will reveal how corporations have dealt with increasing inflation, shifting consumer spending, and an unpredictable supply environment. The recommendations and comments of management teams regarding the forecast for the remainder of 2022 may be even more influential. JPMorgan Chase (NYSE:JPM), Delta Air Lines (NYSE:DAL), PepsiCo (NASDAQ:PEP), UnitedHealth Group (NYSE:UNH), and Morgan Stanley (NYSE:MS) will kick off the second-quarter earnings season next week before the pace heats up significantly in the following month.

According to I/B/E/S statistics from Refinitiv, the consensus expectation of Wall Street analysts is for S&P 500 revenues to be 10.4% higher than in the same period last year, with earnings growth of 5.6%. Excluding the energy industry, which is thriving due to skyrocketing oil and gas prices, earnings are anticipated to decrease 2.4% and sales to climb 6.7%. Second-quarter sales and earnings per share on the S&P 500 are anticipated to set records. However, growth on both fronts is anticipated to decelerate, as are profit margins. This trend will be most apparent during earnings calls. As CEOs and CFOs factor the potential risks and uncertainties in the second half of the year into their predictions, updates to full-year guidance may trend negatively.

Richard Bernstein, chief executive officer of Richard Bernstein Advisors, predicts that management teams would adopt a more prudent stance. Furthermore, he said “We’re on the slow side of the profit cycle—we’re not talking about a profits recession, that’s probably the end of this year or into next year. But we’re clearly past the peak in profit growth.” Concerns of a downturn in consumer spending or a recession may be just that for the time being. The second quarter was not without difficulties, however. Howard Silverblatt, the senior equity analyst at S&P Dow Jones Indices, predicts that inflation and the capacity to pass through expenses will be a major topic on second-quarter earnings calls. Additionally, you will hear much about currency rates.

This year, the U.S. Dollar Index, which measures the dollar against a basket of other currencies, has increased by 9.5%. When the dollar strengthens, foreign-currency sales of multinational corporations are worth less when translated to dollars. Expect corporations to make several adjustments to earnings and growth rates in response to this foreign exchange headwind. For instance, Apple (NASDAQ:AAPL) stated in April that it anticipated the strong dollar would detract three percentage points from its second-quarter year-over-year revenue growth. Jonathan Golub, the chief U.S. equities strategist at Credit Suisse, does not anticipate this earnings season to be particularly challenging for the market. He argues that corporations have been less likely than usual to preannounce bad outcomes before this reporting period.

Golub is more concerned about the impact of Big Tech firms on the profits growth rate of the S&P 500 as a whole. In the first quarter, the combined revenues of Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL), (NASDAQ:AMZN), Meta Platforms (NASDAQ:META), and Microsoft (NASDAQ:MSFT) decreased by 1.5%. This issue is expected to persist in the second quarter; although each company is unique, the main themes include decreasing digital advertising sales, major shifts in spending from online to offline, and difficult comparisons to the previous year’s period of accelerated growth. Golub identifies banks as a potential trouble area for the current earnings season. This will depend more on the confidence of management than on fundamentals, with some banks expected to increase loan-loss reserves established in the first quarter. This is an accounting adjustment to earnings that represents what the management anticipates will occur in the future. However, it will be reflected in the banks’ second-quarter figures.

Analysts will incorporate the results of the current earnings season into their projections for the third and fourth quarters. Currently, earnings growth is expected to reaccelerate into the low double digits for both periods, according to consensus predictions. A turbulent second quarter or pessimistic management projections could hurt these projections. And that is the last thing a market that is down 21% year to date needs.

Featured Image: Megapixl @ Wutzko

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