The first major test for the stock market and fragile investor sentiment in the second half of the year is just around the corner. A parade of earnings reports over the coming month will expose how companies have contended with soaring inflation, shifts in consumer spending, and a volatile supply environment. Management teams’ guidance and commentary on the outlook for the remainder of 2022 may be even more impactful.
JPMorgan Chase, Delta Air Lines, PepsiCo, UnitedHealth Group, and Morgan Stanley will get the ball rolling next week, before second-quarter earnings season really picks up over the following month.
Wall Street analysts’ consensus estimate is for S&P 500 revenue to come in 10.4% higher than in the same period last year, with 5.6% earnings growth, per I/B/E/S data from Refinitiv. Excluding the energy sector, which is booming thanks to sky-high oil and gas prices, sales are expected to decline 2.4% and earnings are expected to increase by 6.7%.
S&P 500 sales and earnings per share are seen hitting record highs in the second quarter. But growth on both lines is expected to slow and profit margins are expected to narrow.
That shift will be most evident in the mood on earnings calls. Updates to full-year guidance may skew negative, as CEOs and CFOs incorporate the potential risks and uncertainties in the second half of the year 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 profit cycle—we’re not talking about a profits recession, that’s probably the end of this year or into next year. But we’re clearly past the peak in profit growth.”
Concerns about a slowdown in consumer spending or an economic recession may be just that for now: concerns. The second quarter itself wasn’t without its challenges, however.
“Inflation and the ability to push through costs is gonna be a big item [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 U.S. Dollar Index (DXY), which measures the greenback against a basket of other currencies, is up 9.5% this year. Multinational companies’ sales in foreign currencies are worth less when converted into dollars when the dollar strengthens. Expect to see companies making plenty of adjustments to earnings and growth rates for that foreign exchange headwind. For example, 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.
Credit Suisse’s chief U.S. equity strategist, Jonathan Golub, doesn’t expect this earning season to be overly problematic for the market. He notes that companies have been preannouncing negative results less than the average going into this reporting period.
Golub is more concerned about Big Tech companies’ drag on the overall S&P 500’s earnings growth rate. In the first quarter aggregate earnings from Apple, Alphabet (GOOGL), Amazon.com , Meta Platforms , and Microsoft fell by 1.5%. That problem looks to continue in the second quarter—each company is different, but the broad themes include slowing digital advertising sales, reopening shifts in spending from online to the real world, and tough comparisons to super-charged growth in the year-ago period.
Golub also points to banks as a potential problem area this earnings season. That will have more to do with managements’ degree of confidence than fundamentals, with some banks likely to add to loan-loss reserves set aside in the first quarter. That’s an accounting adjustment to earnings, and reflects what management predicts will happen next. But for the banks, it will show up in second quarter numbers.
How things shake out this earnings season will flow into analysts’ models for the third and fourth quarters. For now, consensus estimates have earnings growth reaccelerating into the low double digits in both periods. A rocky second quarter or gloomy management predictions could mean downside to those forecasts. And that’s the last thing a market down 21% year to date needs.