Market Brief: What to Watch in Q3 Earnings

Companies are just beginning to report their third quarter results, but investors are gearing up for the worst. Punk’s earnings could bring further downside to an already battered stock market.

Phil Orlando, Chief Equity Market Strategist at Federated Hermes, said: “The trends we saw earlier this year will continue into the third and fourth quarters, leading to slowing growth and a sharp deterioration in margins.”

One exception is oil and natural gas, which remain in high demand and prices, so energy companies will continue to thrive and beat expectations. It was the only sector with a significant upward revision to earnings for the quarter. Another bright spot: Earnings should remain in positive territory across the board, benefiting from higher inflation.

“The swing factor is guidance,” Orlando said, referring to senior management’s practice of providing forecasts for the next quarter and year and setting expectations about the business. “I think it will be very cautious. Q4 and he forwards to full year 2023. His guidance is challenged.”

What to watch for in Q3 earnings

• Economic forecast: Investors will listen for clues from corporate executives as to whether inflation headwinds are waning or strengthening, and whether the economy is gearing up for a recession.
• Consumer demand: Investors will pay close attention to lending activity, new orders, inventories and sales, as consumer spending is critical to sustaining economic growth.
• employment: Businesses are suffering from a tight labor market and staffing shortages during the pandemic. But if demand is easing, watch out for more layoff announcements as companies look to bring costs down.
• Profit rate: How well are companies managing rising costs as demand changes?
• Supply chain: Stalls along the supply chain that move goods and materials are a highly disruptive force, leading to lower sales and higher costs. Improvements in that area would be a relief for investors.
• Currency influence: A strong US dollar is squeezing earnings for large multinationals and technology companies with vast overseas presence. Investors are trying to gauge how long a strong dollar is expected to factor in.

Bank of America’s Equities and Quants Strategist Savita Subramanian appeared in the third quarter preview called “Buckle Up!” She expects earnings to be slightly below expectations, but she sees significant downside risks starting in the fourth quarter, she said. “Guidance will be terrible,” she says. She will hear mentions of recessions, sluggish demand and layoffs.

“Prices have peaked, demand has slowed, but costs are strong,” Subramanian said. “Corporate misery indicators fell further in Q3, suggesting worsening misery and pointing to margin pressures rising. Demand is the main driver of post-COVID pricing power Weaker demand signals lower pricing and margins, and bloated inventories also pose downside risks to margins, especially for many retailers.”

Jeff Kleintop, chief global investment strategist at Charles Schwab, said in a recent article, “The End of Earnings Growth,” that shares will come under further pressure as earnings in the third quarter are likely to fall short of expectations. said it would. Wall Street analysts have steadily lowered estimates to reflect a weaker growth environment, but expectations are still too high, he said.

Kleintop points out that there has been a historically close correlation between the global manufacturer’s purchasing manager’s index and corporate revenue growth. PMI trends tend to be predictive indicators of future earnings.

“Key factors in the PMI, such as new orders, point to a further slowdown in the economy and lower earnings in the coming months,” Kleintop said in a note. “If so, the decline in earnings as a key support for stocks could lead to further stock market plunges in the coming weeks as corporate leaders instruct analysts to further lower earnings expectations. .”

Despite the headwinds of inflation and supply chain disruptions, corporate earnings remained strong in the first half. Now, the combination of slowing economic growth and declining profit margins is starting to hit.

Rising costs for wages, transportation and shipping, warehousing, fuel and energy are squeezing corporate profits and margins. Pressured by extremely high prices for public transportation, including rent, food, health care, new cars and airfare, penny-pinch consumers are retreating and prices are dropping.

In fact, the latest inflation data for September, released last week, showed prices were 8.2% higher than expected year-on-year. The so-called core consumer price index, which excludes food and energy prices, reached a new peak of 6.6%.

Sustained high inflation will continue to put pressure on the Federal Reserve to continue raising interest rates as it seeks to slow the pace of consumer price inflation, the fastest in 40 years.

According to Federated Hermes’ Orlando, technology and consumer goods companies face the most challenges in this environment. Consumer spending is a very important factor in US economic growth, accounting for about 70% of gross domestic product, so the holiday season should be watched closely. He is concerned that margins could come under an unusual amount of pressure. One sign to watch out for: Walmart (WMT) plans to hire fewer seasonal workers over the holiday season than it did last year. We also provide current employees with additional time before adding personnel.

Depending on guidance provided by companies, and based on forecasts of negative economic growth in the first and second quarters and full-year 2023, Federated Hermes has revised its 2023 earnings forecast for the S&P 500 between $230 and $200. I am considering lowering it to This matches the current Wall Street consensus of $238.

Bank of America’s Subramanian also forecasts a $200 return on the S&P in 2023.

“We are well on our way to a full recession next year,” Orlando says. “Directively, that’s what we’re thinking.”

Here are the events scheduled for next week:

• Monday: Bank of America (BAC) and Bank of New York Mellon (BK) report results.
• Tuesday: Netflix (NFLX), Johnson & Johnson (JNJ) and Goldman Sachs (GS) report results.
• Wednesday: Tesla (TSLA), United Airlines (UAL) and Procter & Gamble (PG) report results.
• Thursday: American Airlines (AAL), AT&T (T) and Snap (SNAP) report results.
• Friday: Huntington Bancshares (HBAN), Verizon (VZ) and American Express (AXP) report results.

For the trading week ending October 14th:

• The Morningstar US Market Index fell 1.78%.
• Consumer Defensive was the strongest performing sector, up 1.07%.
• The worst performing sectors were Technology, down 4.37%, and Consumer Business Cycle, down 3.65%.
• US yieldThe 10-year government bond rose to 4.01% from 3.88%.
• West Texas Intermediate crude oil prices fell 7.59% to $85.61 per barrel.
• Of the 843 US-listed companies covered by Morningstar, 282 (33%) rose and 561 (67%) fell.