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What to expect from Q2 earnings season

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A parade of reports on the results is expected this month. Here: Traders on the New York Stock Exchange (NYSE), today, Friday, July 1, 2022.

NYSE

The first major test for the stock market and fragile second-half investor sentiment is fast approaching. A parade of earnings reports over the coming month will outline how companies have coped with soaring inflation, shifts in consumer spending and a volatile supply environment. Advice and feedback from management teams on the outlook for the rest of 2022 could have even more impact.

JPMorgan Chase

(symbol: JPM),

Delta Airlines

(DAL),

PepsiCo

(DYNAMISM),

UnitedHealth Group

(A H),

Morgan Stanley

(MS) will get the ball rolling next week, before the second-quarter earnings season really picks up the following month.

The consensus estimate from Wall Street analysts is that S&P 500 earnings will be 10.4% higher than the same period last year, with earnings growth of 5.6%, according to data I/ B/E/S from Refinitiv. Excluding the energy sector, which is booming on skyrocketing oil and gas prices, sales are expected to decline 2.4% and profits are expected to rise 6.7%.

S&P 500 sales and earnings per share are expected to reach record highs in the second quarter. But growth on both lines is expected to slow and profit margins are expected to shrink.

This change will be most evident in the mood of the results calls. Forecast updates for the full year may be negative as CEOs and CFOs factor potential second-half risks and uncertainties into their projections.

“I think you’re going to see an increasingly cautious tone from management teams,” says Richard Bernstein, CEO of Richard Bernstein Advisors, “We’re on the slow side of the earnings cycle – we’re not talking about “an earnings recession is probably the end of this year or next year. But we’ve clearly passed the earnings growth peak.”

Worries about a slowdown in consumer spending or an economic recession might be just that for now: worries. The second quarter itself was not without its challenges, however.

“Inflation and the ability to push through the costs is going to be a big issue [on second-quarter earnings calls,]says S&P Dow Jones Indices senior equity analyst Howard Silverblatt. “You’re also going to hear a lot about exchange rates.”

The US dollar index (DXY), which measures the greenback against a basket of other currencies, is up 9.5% this year. Sales of multinational companies in foreign currencies are worth less when converted to dollars when the dollar strengthens. Expect to see companies making plenty of adjustments to earnings and growth rates for this currency headwind. For instance,

Apple

(AAPL) said in April that it expected the strong dollar to subtract three percentage points from its year-over-year revenue growth in the second quarter.

Swiss credit
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Chief US equity strategist Jonathan Golub doesn’t expect this earnings season to be too problematic for the market. He notes that companies pre-announced below-average negative results during this reporting period.

Golub is more concerned about the slowdown of Big Tech companies on the overall earnings growth rate of the S&P 500. In the first quarter, the cumulative profits of

Apple
,

Alphabet

(GOOGL),

Amazon.co.uk

(AMZN),

Metaplatforms

(META), and

Microsoft

(MSFT) fell 1.5%. This problem seems to continue into the second quarter – every company is different, but big themes include slowing digital advertising sales, the reopening of spending shifts from the online world to the real world and tough comparisons with a boosted growth of the previous year. .

Golub also points to banks as a potential problem this earnings season. This will have more to do with executive confidence than fundamentals, with some banks likely to add to loan loss reserves built up in the first quarter. This is an accounting adjustment to earnings and reflects what management expects going forward. But for the banks, it will show in the second quarter numbers.

How things play out this earnings season will affect analysts’ models for the third and fourth quarters. For now, consensus estimates call for further acceleration in earnings growth into the lower double digits in both periods. A difficult second quarter or gloomy management forecasts could mean a drop in those forecasts. And that’s the last thing a market that’s down 21% year-to-date needs.

Write to Nicholas Jasinski at [email protected]