What to watch for in the most anticipated earnings season for decades

With a long list of economic headwinds having hammered global growth and dampened investor confidence, the upcoming (second-quarter) US reporting season is going to be an interesting one.

With a long list of economic headwinds having hammered global growth and dampened investor confidence, the upcoming (second-quarter) US reporting season is going to be an interesting one. No doubt, investors will be squarely focused on US corporate earnings, given the ongoing concerns about rising inflation and its effect on the bottom line. One thing’s for sure, reporting season is all about expectations and according to analysts, those expectations are a tad too high. The expectation is that this earnings season could create another share market rout especially if profits miss expectations across the board. Given the myriad of risks, such as rising inflation, supply-chain disruptions, rising energy prices, war in Ukraine and rising interest rates, analysts are also warning of an impending recession.

Doomsday stuff aside, the fact is that US earnings season occurs quarterly, unlike in Australia where it happens semi-annually. Here are the general date ranges for earnings season for each quarter.

•            First quarter (ends March 30): April 15 to May

•            Second quarter (ends June 30): July 15 to Aug. 31

•            Third quarter (ends Sept. 30): Oct. 15 to Nov. 30

•            Fourth quarter (ends Dec. 31): Jan. 15 to Feb. 28

Earnings season begins a few weeks after the end of the prior fiscal quarter and lasts for about six weeks. Second-quarter earnings season will kick off with JPMorgan Chase (JPM), Wells Fargo (WFC) and Citigroup (C) posting results first.

According to FactSet, earnings growth of 4.3% was tipped for the S&P 500 companies, making it the lowest earnings growth rate reported by the index since Q4 2020. “More S&P 500 companies are issuing negative earnings guidance for the second quarter and for the full-year compared to recent averages. Of those companies, 71 have issued negative EPS (earnings per share) guidance and 32 have issued positive EPS guidance.”

While certain companies appear to be doing well on the surface, rising energy prices may have already started to eat away at margins through 2022. Investors will be looking see whether the impact of high energy prices or a rise in inflation have impacted on March-quarter revenue and earnings estimates.

On the positive side, investors are expecting energy and commodity plays to outperform and beat consensus expectations having ridden the surprise boom in commodity prices. Consumer staple retailers’ earnings will be lower but trading income should be solid for the big banks. On the other hand, consumer discretionary stocks such as Amazon will be feeling the pain, as price rises will start to bite into the bottom line. Profit warnings have already come in from Nike and Microsoft, with both set to post weaker sales due to a stronger US dollar. And the tech giants that generate the biggest percentage of sales outside the US, such as Apple, Meta, Alphabet, Netflix and Tesla, will be watched very closely owing to the dollar and rising inflation impact.

So far, the S&P 500 is down 18% year-to-date, and is looking like it will post its worst first-half of any year since 1932. Growth has slowed, with US 1Q GDP coming in at -1.6% and FactSet pointing out that if companies just meet expectations for earnings during April, May and June, “it would leave U.S. companies with their slowest growth in profits since the fourth quarter of 2020.”