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Earnings season for Q3 starts in earnest this week with the traditional curtain-raiser of big bank results.
JPMorgan Chase (JPM), Citi (C) and Wells Fargo (WFC) all weigh in with numbers on Friday.
But analysts and investors are not looking for bullish numbers that can give the overall market a boost, with expectations for earnings per share growth consistently coming down into reporting season and an overall sense that the broader market will react badly.
Downward revisions: Third-quarter S&P 500 (NYSEARCA:SPY) EPS growth is now expected to be 2.6%, down from 9.8% in July, according to FactSet. Analysts have cut profit forecasts by $34B and if the consensus is correct, it would be the worst quarter for bottom lines since Q3 2020, in the depths of lockdown, the FT reported.
What does that mean for stocks? According to the latest MLIV Pulse survey of investors, more than 60% believe this earnings season will push the S&P 500 lower. Among the more than 700 respondents, high level asset allocators are the most pessimistic about the impact of earnings, while risk managers are the most optimistic.
The BlackRock Investment Institute said it thinks earnings estimates still look “optimistic.” It remains underweight U.S. equities “valuations have not come down enough to reflect weaker earnings prospects.”
“If we are headed into a recession next year, which seems highly probable, earnings uncertainty may replace rate pressure as the chief obstacle to higher equity prices,” MKM strategist Michael Darda wrote. “Thus, the next 10 months could be tricky.”
“Long-term investors should thus have time to build long positions into weakness and volatility during the quarters ahead,” Darda said. “Forward and trailing operating earnings for the S&P 500 have typically fallen 15%-20% in recessions. So far, estimates have peaked and plateaued rather than cratered. However, forward indicators do point to more weakness ahead.”
Key stocks to watch: Apple (NASDAQ:AAPL) results will be the most crucial to the market, with 60% of MLIV survey respondents calling it the company that matters most this earnings season. That was followed by J.P. Morgan at 25% and Tesla (TSLA) at 6%, with Microsoft (MSFT) and Walmart (WMT) generating a significant number of votes, according to Bloomberg.
While shares of Apple have declined fairly steadily since the middle of August, they have managed to stay off the lows around $130 hit in mid-June. At the end of September, the 200-day moving average briefly crossed below the 50-day in a bullish signal. Demand for the iPhone 14 has been questioned and will be closely watched when the company reports. In the last three months there have been 23 downward EPS revisions vs. 14 upward revisions, giving it a Quant Rating grade of C.
BofA recently downgraded the stock to Neutral and SA contributor Albert Lin noted that while Apple is a great business the stock isn’t always “a no-brainer.”
Overall pessimism isn’t universal, though. J.P. Morgan’s data assets and alpha group team said that given “the slew of negative pre-announcements, the hurdle to beat earnings is low.”
“Almost universally, people expect Energy (XLE) earnings to be great and every other sector to be horrible,” they said. “Our view is that earnings will come in better than expected and will not act as a headwind for markets.”
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