Earnings Season Begins with Market Hopeful for Positive Results

As earnings season kicks off, investors are eagerly awaiting the financial reports of major companies, hoping for positive results that could support a year-end rally. The recent volatility in the stock market, driven by surging bond yields, has shifted the focus to earnings as the primary driver of market performance.

Despite the market’s 7% decline from its July peak, the equity risk premium, which measures the earnings yield of the S&P 500 minus the yield on the 10-year Treasury, remains relatively stable. This suggests that the recent selloff was primarily influenced by the sudden increase in Treasury yields rather than underlying concerns about earnings power.

PepsiCo is set to report its earnings on Tuesday, followed by Delta Air Lines, Walgreens Boots Alliance, JPMorgan Chase, Citigroup, and Wells Fargo later in the week. Analysts expect third-quarter profits to rise by 0.05%, with hopes that companies will surpass expectations as they did in the previous quarters.

However, there is a concern that earnings estimates have already been raised ahead of this season, potentially setting the stage for disappointment and a resumption of the market decline. A robust third-quarter earnings season is seen as crucial to support a year-end rally. If the economy experiences a delayed impact from rising rates and subsequently falters, it could lead to lower-than-expected profits.

The market’s reaction to any potential downward revisions in earnings estimates will depend on the depth of the cuts and the ability to hold key support levels. If the S&P 500 fails to stay above 4200, it could see a decline to around 4100. In more severe scenarios, rapid drops could push the index down to approximately 3900, representing an 8% downside.

Investors are hopeful that the third-quarter earnings season will not disappoint, as a strong performance could provide the necessary support for a year-end rally. The market will closely watch the results of major companies in the coming weeks, with the hope that positive earnings will outweigh concerns about rising bond yields and contribute to a positive market outlook.

Contact:
Jacob Sonenshine
Email: jacob.sonenshine@barrons.com