The outlook for jobs and spending may be chief among concerns for investors heading into third-quarter U.S. earnings as expectations increase that the Federal Reserve will need to keep an aggressive approach to hiking interest rates.
Estimates for the earnings period have been falling, and analysts now expect S&P 500 companies’ earnings to have grown just 4.1% year over year in the quarter compared with an estimated increase of 11.1% at the start of July, according to IBES data from Refinitiv.
Reporting on the period ramps up with the release of results from JPMorgan Chase & Co and other major banks Friday.
Stocks have struggled recently, with the S&P 500 falling for a sixth straight session Wednesday, partly because of mounting fears among investors that the aggressive stance by the Fed could tip the world’s largest economy into recession and raise unemployment rates. Stocks rebounded Thursday.
Data Thursday reinforced expectations the Fed will deliver a fourth 75-basis-point rate hike next month, with a report showing U.S. consumer prices increased more than expected in September.
“There might not be that many disappointments in the actual results compared to the estimates, but they might tone down any optimistic talk just because of the uncertainty,” said Alan Lancz, president of Alan B. Lancz & Associates in Toledo, Ohio.
Given the interest rate outlook, investors are keen to hear what company executives say about their plans for hiring and investment spending, which would give strong clues about the health of the U.S. economy.
“If we start to hear more about hiring freezes, layoff announcements, reduction in capex... that’s a big red flag,” said Edward Moya, senior market analyst at OANDA in New York.
“That means demand destruction is happening, and that will support the argument that they’re bracing for a recession.”
Earlier this week, Bloomberg News reported chipmaker Intel Corp is planning a major reduction in headcount in the face of a slowdown in the personal computer market, citing people with knowledge of the situation.
Some investors said this earnings season may be too soon to give many indications on changes in capital expenditures, but they will be watching profit margins closely.
“Almost any of the indicators we look at, across the board, are giving a very, very clear signal there is likely to be margin pressure in the coming months,” and that would eventually affect capital spending, said Seema Shah, chief global strategist at Principal Asset Management, in London.
Nike Inc in its recent report warned of a margin squeeze from widespread markdowns, creating worries of sector-wide contagion of ballooning inventory.
Not all signs point to disappointment this earnings season. On Thursday, Walgreens Boots Alliance Inc reported a better-than-expected quarterly profit, and the company also forecast a “better-than-feared” full-year profit, driving its shares higher.
Last month, Rite Aid cut its full-year forecast, citing concerns about consumer spending pressure and supply chain challenges.
Earnings estimates have come down for all of 2022 as well, with S&P 500 profit growth now forecast at 7.4% compared with 9.5% at the start of July, based on Refinitiv data.
Indeed, another big risk to third-quarter earnings is the strengthening of the U.S. dollar, which can hurt U.S. multinationals that need to exchange their earnings into dollars.
“This season, company managements have a panoply of headwinds to blame when offering up disappointing results,” Jack Ablin, chief investment officer at Cresset Capital in Chicago, wrote in a note this week.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.