Published October 14, 2022
Investors await corporate earnings data over the next few weeks with concerns high that declining earnings outlooks will be the next shoe to drop on stocks. The chart below highlights where we have been on corporate earnings and how things have changed.
Let’s dissect what this chart is saying.
Starting from the left, the first quarter (1Q 2022) substantially outperformed expectations as the line zoomed higher. Stocks rose ahead of those earnings as investors got wind of the earnings beat. But interest rates took another step jump higher in April to dampen the party. We can see that Q2 estimates came down during the Q1 reporting season (gray bar period). So the Q1 goodness did not get extended. Partly as a result, stocks cratered hitting new lows in June.
Second quarter earnings (2Q 2022 line) also outperformed leading to an uptick in that line in the 2Q reporting period, albeit the lift was much smaller than Q1. But the Q2 reporting period also saw the beginning of a steep rolloff in Q3/Q4 earnings expectations as recession talk became the focus.
Stocks rallied in July and August despite the drop in earnings outlook as interest rates stopped rising and investors began talking about a possible Fed “pivot” to reducing rates in the first quarter of 2023.
Inflation reports just have not cooperated with the pivot idea, and neither has the Fed. Tough inflation talk became more strenuous from the Fed in late August taking the wind out of the stock rally and leading to another leg down in stocks. Earnings estimates have come down sharply for Q3 (dark line above), especially when we remove energy earnings (dotted line above). Still, earnings estimates show growth in Q4 with the green 4Q line above the dark 3Q line. Meanwhile, yields on the 10-year U.S. Treasury note have leapt from 3% to 4% in a mere six weeks over September to mid-October. All of which has kept pressure on markets in recent weeks.
How those 3Q and 4Q curves shift as this 3rd quarter reporting period goes along will hold the key. Will the market be able to stage a typical 4th quarter midterm election year rally? If companies announce weak earnings, heighten recession talk, and that 4Q earnings estimate gets pounded down lower, markets could have further to fall.
Market Update
Stocks kicked off another week focused on inflation with fresh Consumer Price Index (CPI) data coming during the week. Would the inflation data back off allowing the Fed to ease its inflation-fighting focus? Investors kept the pressure on stocks Monday with the Biden Administration issuing restrictions on semiconductor sales to China. That sent the Nasdaq down -1%. Another -1% slide Tuesday with the United Kingdom’s struggle to sort out its monetary policy continuing to unnerve investors. Wednesday saw a sixth straight losing session with investors continuing to avoid risk ahead of the Thursday release of the CPI report. Wednesday brought a modest -0.3% downdraft with an uptick in producer prices and tough minutes from the Fed’s latest meeting in focus. The CPI report came in hotter than expected Thursday sending stocks lower by -2% in the morning. But a number of technical factors appeared to lead to a furious short-covering rally. Stocks shot upward recovering the morning loss and ultimately closing over +2% higher. The kickoff of earnings Friday found big banks offering mixed reports. After opening higher, the stock market gave back all of its Thursday rally to leave indexes down -2% and essentially where they were before the Thursday CPI report.
Another highly volatile week for stocks ended with the broad market little changed. The S&P 500 (SPY) fell -1.41% to basically give back its small prior-week advance. The Nasdaq 100 (QQQ) printed fresh lows for this bear market with a -3.14% weekly slide. Smallcaps (IWM) held firmer with a -1.03% dip.
Warm wishes and until next week.