There's more pain on the way for the S&P 500 as profit warnings and fears of higher interest rates combine to threaten the key US stock indicator, according to the latest Markets Live Pulse survey.
While earnings seasons have usually been positive for equities in the past decade, according to Deutsche Bank AG strategists, the upcoming one will hurt stocks, said 55% of the 346 MLIV Pulse respondents.
The optimism of a soft landing for the economy is dissipating as stubbornly high inflation keeps central banks hawkish. Bets of higher-for-longer rates, along with grim corporate updates from FedEx Corp. to Exxon Mobil Corp. and Nike Inc., are weighing on market sentiment after strong stock gains made in the first half of the year.
“Negative noise from the earnings season will certainly be an element in helping slow the runaway train that is the US market,” especially if coupled with economic indicators that suggest further rate hikes ahead, said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.
The biggest negative for the earnings season will be the impact of further tightening of financial conditions, said 42% of respondents. Bets remain high for the Federal Reserve to raise rates in July, after Friday’s data showed moderating payrolls, but stronger-than-expected wage growth in June.
The slump in S&P 500 firms’ earnings per share will halt only after the third quarter, according to 48% of survey participants. Analysts, meanwhile, expect EPS for the benchmark’s members to rebound to growth in the final three months of the year, according to data by Bloomberg Intelligence.
The earnings season kicks off in earnest on July 14, when JPMorgan Chase & Co., Citigroup Inc., and Wells Fargo & Co. report. Some 53% of respondents in the survey expect earnings at lenders to disappoint, with this reporting season set to confirm a deterioration in the sector’s outlook and hurt bank stocks.
“If companies fail to meet expectations for the third and fourth quarter in their outlook, then US equities could be particularly vulnerable due to expanding equity valuations this year,” said Peter Garnry, head of equity strategy at Saxo Bank A/S.
Tech stocks will be especially in focus, as their valuations have jumped after the Nasdaq 100 soared 39% in the first half of the year. US stock futures were subdued on Monday after last week's drop. Nasdaq 100 futures underperformed, falling 0.2% by 7:22 a.m. in New York.
While the tech rally was boosted by the hype around artificial intelligence, over 70% of survey participants say the impact of AI on tech earnings is overblown. That leaves companies leading the AI push, such as Nvidia Corp. and Microsoft Corp., more vulnerable to stock declines if their earnings disappoint investors.
“Higher yields will put in particular pressure on long-duration assets such as tech stocks,” said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg. “We are more skeptical for third and fourth quarter US earnings as consensus expectations are very optimistic.”
Amid the gloom, the biggest positive drivers for equities will be any signs of easing inflation and cost cutting, according to the majority of those surveyed.
Overall, however, the picture looks bleaker this time around than the surprisingly resilient first-quarter earnings. JPMorgan strategist Mislav Matejka said margins will come under pressure as companies lose the ability to keep raising prices when inflation cools and as growth slows.
“There are likely to be winners and losers, but ultimately conditions are getting harder for everyone,” said James Athey, investment director at Abrdn in London.
The biggest test of corporate health will come the week of July 24, when more than $25 trillion worth of companies will update investors.
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