Stock Market Anticipates a Season of Conflicting Earnings Reports

by Wall Street Rebel - Michael London | 10/12/2022 8:48 AM
Stock Market Anticipates a Season of Conflicting Earnings Reports

Investors watching increase after increase of interest rates are getting tired of second-guessing the Federal Reserve's efforts to battle inflation. So they are looking to corporate profits the earning season for some guidance as they prepare for the third quarter.


In the following weeks, companies that spend billions of dollars annually and employ millions of people will report financial results that will hint how the U.S. economy could fare in the months ahead. Investors are looking for reassurance during this period of considerable uncertainty.

Since the summer, when business management lasts updated shareholders on the company's progress, interest rates have risen, increasing the company's operating expenses. However, both consumer spending and employment levels have remained stable, suggesting that business profits may also increase.

However, many investors are concerned that the Federal Reserve's efforts to curb inflation and slow the economy will have caught up with a corporate performance by this point, which would harm sales and earnings in the third quarter. That might persuade businesses to reduce their workforces and put fewer resources into new projects during the next several months, which would enhance the likelihood of a recession in the United States. Others on Wall Street are seeing indications that inflation may be starting to decline, which may reduce the chance of a recession and safeguard businesses from suffering significant financial losses.

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This is not the first time optimism has given way to renewed concern over the outlook for the economy. The back and forth between conflicting narratives draws attention to the unpredictability that many people on Wall Street are feeling right now. The stock markets have also shown clear signs of this phenomenon. A small rise to start the month gave way to additional selling as optimism, for not the first time this year, gave way to fresh anxiety over the prognosis for the economy.

A good number of market observers hope that the Federal Reserve would increase interest rates by exactly the right amount to keep inflation under control without triggering a recession. If there is, in fact, a "soft landing," it will be beneficial to the bottom lines of businesses. At least one data point reflects optimism on the possibility that it might. According to statistics provided by FactSet, analysts anticipate that profits for businesses included in the S&P 500 will climb by around 7.5 percent both this year and next. This is an exceptionally cheerful projection considering that many investors are still concerned about a deepening economic slowdown.

According to Ed Yardeni, head of Yardeni Research, a research organization, "Investors are assuming that tighter monetary policy would create a recession, although the analysts are talking to the firms and receiving a generally positive response."

One of the reasons why some experts are still keeping their fingers crossed for 2023 is that businesses have not yet released their predictions for the next year. This may be the case since executives at corporations may not have a crystal clear image of what is going to happen to their companies in the next year, and as a result, they may not provide many hints during the current earnings season. Jamie Dimon, the chief executive officer of JPMorgan Chase, is one of the few corporate executives who has spoken out. He recently projected that the United States would enter a recession within the next six to nine months. On the other hand, the International Monetary Fund (IMF) projected on Tuesday that the GDP of the United States would expand by one percent.

Already, some of the largest firms in the world are beginning to slow down.

The previous month, FedEx said that it was going to reduce investment and freeze employment because it anticipated lower demand for its shipping services. As a result, the value of the company's shares decreased by one-fifth. On Friday, the world's largest electronics company, Samsung, reported preliminary sales and profit data for the third quarter that fell short of forecasts. This clearly indicated consumer interest in Samsung's goods was declining.

However, according to FactSet, profit forecasts for the S&P 500 in 2023 have decreased by just 4 percent this year.

The optimism prevalent on Wall Street at the beginning of this year has already been shattered many times.

Stocks continued their upward trend into August as corporations announced results for the second quarter that was stronger than anticipated. Investors were placing bets that inflation was beginning to abate and that businesses would emerge relatively undamaged from the campaign the Federal Reserve was running to drive prices down by hiking interest rates.

Then, officials from the Federal Reserve made it plain that they were far from done and that inflation remained too high. This was a point reinforced by economic statistics in September, which, by the end of the month, had brought the stock market to new lows. The stock market experiences a steep decline whenever economic data, such as the employment report that was released last Friday, continues to show that the economy is humming along at a rapid pace. Since reaching its high point in January, the value of the S&P 500 index has dropped by over a quarter.

After about two years of record earnings, firms are entering an uncertain era, another cause for the unease on Wall Street. During the epidemic, their sales were expanding quickly enough to surpass increases in expenses, which resulted in healthy profit margins. This growth was encouraged by payments from the government designed to stimulate the economy.

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The current fear is that those margins are diminishing since expenses are still growing at many firms, even while sales are slowing down. The culprits for this include higher borrowing rates, higher salaries, and supply chain inefficiencies that are difficult to address.

The shakeup that investors anticipate to take place at corporations will almost certainly affect the individuals who work for such organizations. Meta has declared a hiring and budget freeze, and it is anticipated that more major names will follow suit. Some experts believe that the massive recruiting binge that many businesses embarked on throughout the majority of the epidemic has caused an erosion in the productivity of those businesses by leading to a reduction in production per employee and that this would ultimately lead to layoffs.

The performance of the significant corporations, whose stocks contributed to driving the market to its peak as well as any statements made by those companies, will be of special interest to investors.

Because of the way the stocks in the S&P 500 index are weighted, a very small number of huge corporations, like Microsoft, Apple, and Amazon, are responsible for a significant portion of the index's decrease.

These firms are essential indicators for the economy when it comes to things like employment and corporate spending, but they are also signs of how benchmark stock indexes will perform in the future.

Another topic of discussion on Wall Street is whether or not the majority of pessimistic economic projections have already been priced into the market.

The analysts with the most optimism believe that stock prices are beginning to seem to be reasonably priced. At the end of trading on Monday, the S&P 500 was trading at a ratio of 15 times what experts anticipate firms included in the index will earn in the next year. This multiple is not overly costly. However, suppose profits — both for the current quarter and going forward into the next year — come in lower than expected. In that case, the market might fall much further.


                     This earnings season could be pivotal, says SoFi's Liz Young



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Alt:(Investor Education) 

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