Next week’s corporate earnings reports may point to ‘recessionary earnings’
Next week investors will focus on how much inflation and a slowing economy have dampened corporate earnings, as companies including Goldman Sachs, Netflix and Procter & Gamble reported earnings. Shares have been higher this past week, with the market getting a boost from buying early in the new year. By Friday, the mood had soured after earnings reports from major banks. JPMorgan Chase, which beat estimates, said it was setting aside more money to cover credit losses because its bottom line now is that the US economy will enter a “mild recession.” A variety of companies reported in the four days following the Martin Luther King Jr. Monday holiday. They include JB Hunt Transport, United Airlines, Morgan Stanley, Alcoa, and SLB. “This will be the beginning of the hour for earnings recession,” said Amanda Agati, chief investment officer at PNC Asset Management Group. Earnings are expected to fall 2.2% for S&P 500 companies in the fourth quarter, but would fall 6.6% if energy is excluded, according to Refinitiv. The most recent drop in earnings occurred during a deep pandemic-induced recession in 2020. “Revisions were very negative in earnings season, so the benchmark is very low,” Agati said. Even if earnings beat estimates, they’re still expecting a negative quarter. For the second consecutive quarter, Agati said, energy, trade and distribution services saw the most positive reviews. The segment includes Grainger, United Rentals and Fastinal, which releases its reports on Thursday. She added that the upward revisions could be a sign that supply chains are returning to normal. Analysts expect there to be two negative quarters, depending on how deep a recession the economy enters. The PNC expects the recession to begin in the second quarter and end in the fourth quarter. Talks rages about recession “There hasn’t been a recession without a recession in earnings since World War II,” Agati said. This upcoming earnings week could be an important step toward assessing the health of companies’ balance sheets, said Art Hogan, chief market strategist at B. Riley Financial. “Is the consensus estimate for the S&P500 overrated, or is it almost in the right place?” He said. “If this remains the case… there will be reason for this market to have a tailwind other than a pause from the Fed.” Agati expects more CEOs will discuss the recession this quarter. “I expect this message to ring out loud across the S&P 500 world,” she said. “I think the market is a bit delusional. There is a real disconnect where the rubber meets the road between the market and the underlying fundamentals.” Strategists expect the Federal Reserve to halt its rate hikes in the spring, but traders in the futures market are betting that policymakers will move quickly to cut interest rates by the end of the year. The Fed’s projections don’t show rate cuts until 2024. “I think the market is taking a stand for the Fed paused, and we don’t know for sure if that’s the case,” Agati said. The central bank has vowed to crush inflation, and economists expect to raise interest rates by half a percentage point on February 1, while the market expects only a quarter-point increase. The consumer price index fell slightly in December, although inflation is still running at a high annualized rate of 6.5%. The focus on comments from the Fed’s speakers may be key next week, because they will be in a blackout period before Friday, January 31-February. one meeting. A number of officials have made appearances on a specific schedule including Fed Vice Chairman Lyle Brainard, who will speak about economics at the University of Chicago Booth School of Business Thursday at 1:15 p.m. ET. Fed Governor Christopher Waller will be interviewed by CNBC’s Steve Leizman on Friday at 1 p.m. ET on the Council on Foreign Relations. There is also some notable economic data in the calendar. Retail sales and the producer price index were released on Wednesday, as was the Fed’s Beige Book. Residences begin on Thursday and existing home sales on Friday. The Empire State Manufacturing Survey will be released on Tuesday and the Philadelphia Fed Manufacturing Survey will be released on Thursday. Agati said the December retail sales report will be an important gauge of holiday shopping and consumer strength in general. “The consumer has been under tremendous pressure, but it has held out for much longer than we expected,” she said. “The consumer is still in better shape, relative to this point in previous cycles. The consumer is hanging in there for now but can only hold on for a while longer. We expect retail sales to stay pretty good for now. But I think that will start to roll.” Next week’s calendar is Monday, Martin Luther King Jr. day markets are closed on Tuesday. [January] 3:00 p.m. Federal Reserve Bank of New York President John Williams Wednesday Earnings: PNC Financial, Charles Schwab, Prologis, Alcoa, Discover Financial, JB Hunt Transport 8:30 a.m. Retail [December] 8:30 a.m. PPI [December] 8:30 a.m. Survey of business leaders [January] 9:00 a.m. Atlanta Federal Reserve Chairman Raphael Bostick 9:15 a.m. Industrial Production [December] 9:30 a.m. St. Louis Fed President James Bullard 10:00 a.m. Business Inventories [November] 10:00 a.m. NAHB survey [January] 1:00 PM Kansas City Fed President Esther George 2:00 PM The Beige Book 3:15 PM Philadelphia Fed President Patrick Harker 4:00 PM TIC data [November] 5:00 p.m. Dallas Federal Reserve Chairman Lori Logan Thursday Earnings: Netflix, Procter & Gamble, Truist Financial, Key Corp, PPG Industries, Northern Trust, Comerica, Fastenal, Third Third, 8:30 a.m. Initial jobless claims, 8:30 a.m. Housing starts [December] 8:30 a.m. Federal Manufacturing in Philadelphia [January] 9:00 a.m. Boston Fed Chair Susan Collins 1:15 p.m. Fed Vice Chair Lyle Brainard 6:35 p.m. Friday Williams from the Federal Reserve Bank of New York Earnings: SLB, Allie Financial, Huntington Bankers, State Street , Financial Districts, LM Erickson 9:00 a.m. Philadelphia Fed’s Harker 10:00 a.m. Existing Home Sales [December] 1:00 p.m. Federal Reserve Chairman Christopher Waller at CFR