Investors who have been concerned about the recent drop in stock prices are hoping that the upcoming earnings season will bring some positive news.
Throughout most of 2023, U.S. stocks have been rising strongly, even though corporate profits haven’t been very impressive. However, a sharp decline in bond prices has caused long-term interest rates to rise to levels not seen in over a decade. This has dampened the enthusiasm for stocks. On top of that, there’s a growing belief that the Federal Reserve will keep interest rates high for a longer period, which is making investors even more nervous.
Since the end of July, the S&P 500 index has fallen by 6.1%, reducing its year-to-date gains to 12%. This drop has erased most of the gains that the Dow Jones Industrial Average had made in 2023.
Experts estimate that companies in the S&P 500 will report a 0.3% decrease in third-quarter earnings compared to the same period last year. However, because most companies tend to surpass these estimates, some investors are optimistic that the third quarter might actually show the first increase in earnings in a year.
Recently, market sentiment has been heavily swayed by factors like bond yields and the actions of the Federal Reserve. However, investors are hopeful that the upcoming earnings season will shift the focus back to the core value of stocks: the profits and growth potential of companies.
Sam Stovall, the chief investment strategist at CFRA, stated, “Investors are hoping that earnings can help us recover from this downward trend.”
In the upcoming week, investors will be closely examining the financial results of major banks such as JPMorgan Chase and Citigroup, along with PepsiCo and Walgreens Boots Alliance. Additionally, they will be analyzing the latest data on consumer and producer prices, which are likely to influence the Federal Reserve’s decisions on interest rates.
The recent monthly jobs report, released on Friday, revealed the strongest growth in payrolls since January, indicating a robust economic momentum that may lead to further interest rate hikes by the Federal Reserve. Following the report, the yield on the 10-year U.S. Treasury note, which affects borrowing costs for things like mortgages and corporate loans, briefly rose to around 4.9%.
When bond yields are high, it makes stocks seem less appealing because bonds offer a safer return. This means that the bar for investing in riskier assets like stocks is set higher. Additionally, high interest rates can increase the cost of borrowing money for companies, which might impact their financial performance.
Investors are also paying close attention to quarterly earnings reports and statements from company leaders to get insights into the state of consumer spending. While household spending increased during the summer, people have saved less money compared to the peak levels seen during the pandemic. Furthermore, the resumption of student loan payments could take up to $100 billion out of the pockets of Americans in the coming year.
Mark Luschini, the chief investment strategist at Janney Montgomery Scott, emphasized his interest in what the management of major and regional banks has to say about their consumer banking customers. He mentioned, “The banks are like the lifeblood of the economy.”
Recent quarterly reports provide a mixed view of consumer behavior. Nike’s stock saw a boost after the company exceeded Wall Street’s earnings predictions last month. The company’s leaders stated that demand remains strong, and consumers are showing resilience.
However, Conagra Brands, a food company known for products like Slim Jim meat sticks and Chef Boyardee canned pasta, reported lower-than-expected sales for the quarter. They attributed this to a broader slowdown in consumption across the industry. Following this report, Conagra’s shares reached a new low for the year.
Sean Connolly, the CEO of Conagra, commented during the company’s earnings call, saying, “After three years of unusual inflation and other economic factors, consumers have been feeling more financial pressure and have been using various strategies to manage their finances.”
According to FactSet, analysts anticipate that communication-services companies will show the highest year-over-year earnings growth among the S&P 500 sectors, with a growth rate of around 31%. Meta Platforms is expected to be the biggest contributor to this growth. On the flip side, the energy sector is expected to experience the largest decline in profits, compared to last year when oil prices surged, leading to robust earnings in that sector.
Investors have another worry on their minds, and that’s how a strong U.S. dollar might affect the money companies make from overseas sales. When the dollar is strong, it can make products sold by U.S. companies in other countries more expensive, which can hurt their sales. The WSJ Dollar Index, which measures the dollar’s strength against 16 different currencies, has gone up by about 6% since February. Interestingly, more than a quarter of the companies listed in the S&P 500 earn most of their money from outside the United States, as noted by FactSet.
Nancy Tengler, the CEO and Chief Investment Officer of Laffer Tengler Investments, expressed her concern, saying, “I’m not as worried about interest rates as I am about how the strong dollar will affect multinational companies.”
In the previous earnings season, when investors saw stocks as being “priced perfectly” after a significant increase, companies didn’t receive as much reward for performing better than expected. However, now that stock prices have come down from their peak levels and appear more reasonably priced, investors are on the lookout for opportunities to buy.
Nancy Tengler mentioned that she’s considering increasing her investments in certain technology stocks, like Microsoft, which have slowed down from their highs in 2023.
Investors often assess whether stocks are cheap or expensive by looking at the price-to-earnings ratio. Currently, companies in the S&P 500 are trading at around 17.7 times their estimated earnings for the next year, which is lower than the five-year average of 18.6. This suggests that stocks may be relatively more affordable now.
The predictions for earnings in the latter part of 2023 and next year are looking quite optimistic. According to FactSet, analysts anticipate that the profits of companies in the S&P 500 will increase by approximately 7.8% in the fourth quarter of this year and by 12% in 2024.
David Waddell, the CEO of Waddell & Associates, described this year’s market rally by saying, “We’ve been trading based on excitement. What we really need are some solid foundations, and it looks like that’s just on the horizon.”
