By As the quarterly corporate earnings reporting season approaches, analysts are predicting a departure from the norm. Traditionally seen as a buying opportunity for the U.S. stock market, this summer could prove to be a “sell the news event” for stocks, according to Nadia Lovell, senior U.S. equity analyst at UBS Global Wealth Management.
Unlike previous years, where U.S. stocks have experienced significant gains during the four-week period when major companies share their results, this earnings season could bring a change. A recent analysis by Deutsche Bank reveals that the S&P 500 index has typically recorded a median quarterly gain of about 2% during this period, compared to a median gain of 1.7% for the remainder of the quarter.
Jim Reid of Deutsche Bank points out the stark difference in performance, noting that earnings season accounts for 30.7% of the year, with the remaining 69.3% comprising the rest. However, given the recent rally and investors’ renewed confidence in the market, even Reid acknowledges that this time might defy historical trends.
Echoing similar doubts, Nadia Lovell suggests that the market may have outpaced the underlying fundamentals. While the buy side anticipates a more optimistic outlook for companies, price-to-earnings multiples are beginning to appear inflated.
These indications hint at a potential shift during this earnings season, setting it apart from previous ones. As we enter this critical period, investors and market participants will closely watch to see if this anticipated change in fortunes comes to pass.
S&P 500 Earnings Decline for Q3 2022
The latest blended estimate from FactSet reveals that S&P 500 firms are projected to report a 7.1% decrease in earnings compared to the same quarter last year. If this estimation holds true, it will signify the largest year-over-year decline since the second quarter of 2020, when the COVID-19 pandemic led to a massive 31.6% drop in profits. Moreover, it will mark the third consecutive quarter with lower earnings than the previous year.
Despite the decline in earnings, S&P 500 firms are currently being valued at over 19 times forward earnings, surpassing the five-year average of 18.6 and the ten-year average of 17.4. This valuation suggests that stock valuations are on the higher side. As such, earnings must surpass Wall Street’s typically conservative estimates by a significant margin to sustain the ongoing rally.
Recently, major U.S. banks including JPMorgan Chase & Co., Wells Fargo & Co., and Citigroup Inc. experienced an initial boost in their stock prices following the release of their earnings reports. However, by market close, these gains were mostly or entirely reversed. According to experts, this pattern could become a common occurrence in the market’s response to upcoming earnings reports over the following weeks.
While the S&P 500 experienced a slight dip into negative territory on Friday afternoon, it is set to end the session down by only 0.1% at 4,507. Notably, the index achieved its highest closing since April 5, 2022, on Thursday and will reach a fresh 15-month high if it manages to close positively on Friday. With a year-to-date increase of 17.4%, as per FactSet data, the index has significantly reversed its 19.4% decline from 2022.
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