Investors are watching guidance this earnings season, but might not like what they see
By Krystal Hur, CNN
Corporate guidance statements will be front and center as earnings season kicks off, with investors trying to gauge the economy’s temperature. Things could get chilly.
Analysts forecast that first-quarter earnings for companies in the S&P 500 will fall 6.8% from the same period the previous year, according to FactSet. That would be the biggest earnings decline since profits plunged nearly 32% in the second quarter of 2020, after the onset of the Covid pandemic.
Wall Street is searching for answers to two key questions: Is the economy headed for a recession? And, if so, who’s poised to weather it?
Investors might be disappointed by what they find.
“We all expect earnings to be less than stellar,” says Shana Sissel, chief executive officer at BanrÃon Capital Management. “In the last quarterly earnings, we saw a lot of really negative guidance from companies, and I don’t foresee that being much different going forward.”
Recession fears have ramped up in recent weeks after the banking tumult last month raised concerns about the financial sector’s health.
Earnings season for banks starts on Friday with JPMorgan Chase, Wells Fargo, BlackRock, Citigroup and PNC Financial Services slated to report before the bell. Investors will be watching for clues about stability.
Stocks have yet to price in the economy’s precarious position, with the S&P 500 adding about 7% this year. But markets have already seen volatile trading this week, after investors digested a jobs report that came in below expectations and awaited a slate of inflation data that could help decide the Federal Reserve’s next interest rate decision. Stocks rose Wednesday morning after the latest Consumer Price Index showed that annual headline inflation cooled in March for a ninth consecutive month.
“We’re going to see a correction happen here, because it just never makes sense when the market’s going up and earnings are going down,” says Eric Sterner, chief investment officer at Apollon Wealth Management.
Expected turbulence ahead
The White House and other officials have called on regulators to implement tighter rules for banks to prevent future collapses. The Biden administration last month urged federal banking agencies to reverse the Trump administration’s regulatory rollbacks.
“Greater regulation probably means lower margins or lower utilization of balance sheets for banks, which tends to be a bad thing for earnings growth,” said Jason Pride, chief investment officer for private wealth at Glenmede.
Investors have homed in on corporate guidance since last year to gauge companies’ pricing power as sticky inflation drove up supply costs and weighed down balance sheets. However, they’re particularly important this year, since banking-sector troubles have heightened fears of an economic downturn.
Big Tech stocks will also be in focus. These companies already tend to dominate earnings season due to their outsized weighting in the equities market — Microsoft and Apple have reached a whopping 13.4% combined weighting in the S&P 500, according to data from Strategas Securities.
But tech earnings are especially key this time around, since behemoths in the sector have driven much of the equity market’s gains this year after becoming a haven for investors during the first quarter. Shares of Nvidia have skyrocketed about 86% this year, Meta Platforms gained about 78% and Tesla surged roughly 52%.
Still, earnings are just one factor driving markets, and inflation remains a key concern for the Fed. The central bank raised interest rates last month by a quarter point. Analysts largely expect the Fed to do the same at its May meeting, according to the CME FedWatch Tool.
But Wall Street remains overly optimistic that the Fed will cut rates later this year — even after officials indicated last month that they likely won’t — or that it could even orchestrate a soft landing. That hope, and the market’s resilience, could start to crumble in the next few weeks, said Megan Horneman, chief investment officer at Verdence Capital Advisors.
“You very well could see that catalyst over the next couple of weeks with earnings, and then this inflation data and then what the Fed says when they meet,” said Horneman.
The-CNN-Wire
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