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Why this earnings season could help stabilize the shaky market rally

Analysis by Krystal Hur, CNN

(CNN) — The third-quarter earnings season begins on Friday, marking the next test for this year’s wobbly US stock market rally.

Investors had a low bar for earnings during the first half of the year, making it easier for companies to handily beat expectations, but that bar’s getting higher for the back half of the year.

The benchmark S&P 500 index has slid roughly 5% from its most recent peak in late July, as hot economic data, signs of inflation edging up and the Federal Reserve’s indication that it will keep interest rates higher for longer spooked investors and sent bond yields surging.

“Investor sentiment is fickle. If companies fail to beat loftier future earnings expectations this quarter, faltering sentiment could send stocks reeling,” wrote Michael Arone, chief investment strategist at State Street Global Advisors’ US exchange-traded funds business, in a note.

Analysts expect a 0.4% year-over-year decline in third-quarter earnings for companies in the S&P 500 index, according to FactSet. If that pans out, it’ll mark the fourth consecutive quarter of earnings declines for the index.

On the other hand, a lack of corporate news recently has helped stoke the uncertainty brewing in the market, says Jay Hatfield, chief executive at Infrastructure Capital Management. That means that as investors hear straight from the horse’s mouth what’s going on, some fear could ease and in turn lift stocks.

“We were cautious while earnings season was not going on, and now we’re getting bullish,” Hatfield said.

Banks commence the earnings season. A slew of big banks report Friday, most notably economic bellwether JPMorgan Chase. Analysts expect America’s biggest bank to report earnings per share of $3.90 and revenue of $39.57 billion for the third quarter, according to Refinitiv.

The bank’s performance so far this year bodes well for its ability to meet those expectations — which in turn could set up a promising start for third-quarter earnings season.

JPMorgan Chase reported record revenue of $41.3 billion last quarter and earnings of about $4.37 per share, excluding significant expenses like its purchase of collapsed regional lender First Republic Bank. That came after the bank roundly beat profit and revenue expectations for the first quarter.

Investors will also be on alert for comments from chief executive Jamie Dimon about the state of consumer spending, as worries that the Fed’s higher-for-longer interest rate stance could squeeze the economy loom over Wall Street.

Dimon said last quarter that consumer spending remains healthy despite cash buffers slowly draining. But he also warned that the economy faces several challenges that threaten its resilience, including inflation, high US government debt and the Fed’s efforts to shrink its balance sheet and tame inflation.

“I don’t know if it’s going to lead to a soft landing, a mild recession or a hard recession,” Dimon said during a July call with journalists.

Citigroup, Wells Fargo and BlackRock also report earnings Friday.

ExxonMobil agrees to buy shale rival Pioneer in $60 billion deal

ExxonMobil has agreed to buy Pioneer Natural Resources, a major shale oil producer in a deal that will more than double Exxon’s footprint in the Permian Basin in the southwest United States, reports my colleague Chris Isidore.

Though it’s the largest US oil company, ExxonMobil was relatively slow to develop shale oil as the rest of the industry used it to greatly increase US oil production in the last decade. Pioneer is the largest producer in the Permian Basin, with 850,000 net acres in the area around Midland, Texas. ExxonMobil has 570,000 net acres in the Delaware and Midland Basins.

ExxonMobil’s Permian production volume would more than double to the equivalent of 1.3 million barrels of oil a day as a result of the deal, according to the company.

“Pioneer is a clear leader in the Permian with a unique asset base and people with deep industry knowledge. The combined capabilities of our two companies will provide long-term value creation well in excess of what either company is capable of doing on a standalone basis,” said ExxonMobil CEO Darren Woods.

Read more here.

NY officials announce legislation aimed at protecting kids on social media

Two new bills meant to protect children’s mental health online by changing the way they are served content on social media and by limiting companies’ use of their data will be introduced in the New York state legislature, state and city leaders said Wednesday.

New York Gov. Kathy Hochul and New York Attorney General Letitia James made the announcement at the headquarters of the United Federation of Teachers Manhattan, joined by UFT President Michael Mulgrew, State Sen. Andrew Gounardes, Assemblywoman Nily Rozic and community advocates.

“Our children are in crisis, and it is up to us to save them,” Hochul said, comparing social media algorithms to cigarettes and alcohol. “The data around the negative effects of social media on these young minds is irrefutable, and knowing how dangerous the algorithms are, I will not accept that we are powerless to do anything about it.”

The “Stop Addictive Feeds Exploitation (SAFE) for Kids Act” would limit what New York officials are calling the harmful and addictive features of social media for children, report my colleagues Athena Jones and Brian Fung.

The act would allow users under 18 and their parents to opt out of receiving feeds driven by algorithms designed to harness users’ personal data to keep them on the platforms for as long as possible. Those who opt out would receive chronological feeds instead, like in the early days of social media.

Read more here.

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