Earnings could be an even bigger catalyst for equities after market concerns over interest rates

news7g07/16/2022

4 3 minutes read

Earnings could be an even bigger catalyst for equities after market concerns over interest rates

Traders on the NYSE, July 12, 2022.

Source: NYSE

Investors are likely to shift focus to earnings season, after the market rises and falls Federal Reserve rate hike expectations.

Stocks have been volatile over the past week. The three major indexes rallied on Friday, after Worried that the Fed will raise interest rates completely fading this month. Still, stocks posted weekly losses, with the S&P 500 down nearly one percent at 3,863.16.

One unexpected 9.1% year-over-year increase in June consumer inflation Wednesday promotes speculation Fed will be ready to fight rising prices by overcoming a three-quarter point increase, predicted on July 27.

But by Friday, comments from Fed officialsunexpected 1% increase in Retail sales in Juneand some better data on consumer inflation expectations reversed those expectations in the futures market.

“It’s really been a great study into crowd psychology. We went into the week with a 92% chance of a 75 basis point increase and we left Wednesday with an 82% chance of a 100 basis point gain. “, said Art Hogan, director of market strategy at National Securities. One hundred basis points equals one percentage point.

On Friday, strategists said there was only about a 20% chance of a 100 basis point rally entering the market.

In the coming week, earnings news could be dramatic as a diverse group of companies reports. Major banks continue with reports on Monday, with releases from Bank of America and Goldman Sachs. Johnson & Johnson, Netflix and Lockheed Martin Post results on Tuesday. Tesla and United Airlines release their quarterly figures on Wednesday. AT&T, Union Pacific and Traveler among Thursday’s reports. American Express and Verizon both release earnings on Friday.

Besides earnings, there are some important data releases, mainly on housing. The National Association of Home Builders (NAHB) / Wells Fargo Housing Market Index is due on Monday. Home buying starts on Tuesday, and existing home sales are due on Wednesday. On Thursday, there’s the Philadelphia Fed manufacturing survey. Finally, both manufacturing and services PMIs are released on Friday.

“Every data point matters and so does what companies are saying. Next week … it’s a much broader picture of earnings and the economy,” said Quincy Krosby, chief equity strategist at LPL Financial said. “If there are negative revisions and concerns grow from the guidance, I think then you’ll see the question of how the Fed will interpret that… The other point is whether the market can build momentum. increase today or not.”

Expected earnings

Strategists had expected the second-quarter earnings season to be filled with disappointments and downward corrections, as companies deal with inflation, supply chain issues, staff shortages – and Currently the economy is slowing down.

“We could move into earnings and that would take up all the oxygen in the room. There’s a chance this is where the market could gain some traction,” Hogan said. “We haven’t really gotten a response from anyone but the big banks. It’s likely that expectations are too low and the narrative around guidance is that it’s going to have to come down. If not, there’s a chance we’re going to have to.” will see a positive response to that.”

Earnings for S&P 500 companies are expected to grow 5.6%, based on actual reports and estimates, according to I/B/E/S data from Refinitiv. As of Friday morning, 35 S&P companies reported, and 80 percent of them reported earnings that beat forecasts, Refinitiv found.

Hogan notes that at the end of earnings season, companies typically hit a 65 percent pace. “It’s just a function of following your lead. The same guidance would be good enough,” he said. “We’ve seen that with First PepsiCo out of the gate, kept the forward guidance intact, and the stock was applauded for that. That may be the norm, not the exception. “

Krosby said investors will also keep an eye on housing data, following a rapid rise in mortgage rates.

“It’s a focus on real estate, which is important because we want to see how the housing market is going up,” she said. “That’s the focus of the Fed to slow down the housing market. We’ll see how that plays out.”