The stock market got off to a better start in October, after ending the prior month in a sea of red. However, the upcoming third-quarter earnings season is concerning.
The U.S. Dollar index and the treasury note yield are at high levels, with unprecedented inflation. Those three extreme things are intertwined, which makes the market know that this earnings season will be terrible, but everyone has no idea how bad it is.
Some companies have reported bad earnings in the past two weeks. FedEx, Nike, Micron Technology, CarMax and Carnival Cruises are all considered pessimistic signals in different sectors.
Goldman Sachs noted that the past few weeks have seen a significant uptick in preannouncement activity. Large cap, bellwether stocks have provided investors with updates ahead of their regularly scheduled earnings, as a deteriorating fundamental environment drives potentially large deviations from expectations.
Below, GS highlight select recent preannouncements, some of which drove shifts in sentiment across equity markets.For the second quarter in a row, more than 10% of the S&P500 market cap has preannounced earnings. The last time this occurred was 1Q and 2Q 2020, highlighting the potential for firms to preannounce in periods of high uncertainty.
Wall Street lowered their third quarter earnings estimates more than normal in the past three months, according to FactSet senior earnings analyst John Butters. The estimated earnings growth rate for all the companies in the S&P 500 index now stands at 2.9% and, if that turns out to be the actual number for the quarter, it will prove the slowest rate of expansion since the third quarter of 2020, when earnings fell 5.7%.
Analysts couldn't agree on the S&P's earnings forecast. Bank of America estimates the annual EPS for the S&P 500 in 2022 is $200. CNBC quoted Bank of America investment officer Chris Hyzy as saying that the annual earnings per share range for the S&P 500 is $150 to $240. The breadth of the forecast is unprecedented, reflecting high uncertainty among analysts and ambivalence on Wall Street.
The S&P500's forward PE to 2023 has dropped to 15.4 multiples, which is significantly lower than 21 multiples at the beginning of this year. This is lower than the average of 18.6 multiples in the past five years and 17.1 multiples in 10 years.
Historically, the forward PE during the recession was 12-15 multiples, and now it is very close to this range, which is primarily due to the decline in stock market valuation. The S&P 500 index has dropped from a high of 4800 points at the beginning of the year to less than 3800 points. If most of the S&P 500 stocks beat market expectations. Then the S&P 500 index would likely bounce back with improving profits. However, if large companies have poor earnings and lower their guidances, the index valuation may be revised again due to the contraction of profits.
From next week, the banking sector will lead the earnings season. Retail banks can remain relatively strong despite the strong US dollar. And rising interest rates which can enable banks to earn more interest income. However, people are worried about the economic slowdown and may reduce their loans. Otherwise, the investment banking business will be against the wind due to the macro environment.
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