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Impending US earnings season and inflation concerns weigh on sentiment

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2023-06-26

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As the second quarter comes to a close, the looming US earnings season is expected to significantly influence market sentiment. Investors are grappling with the reality that inflation has not subsided and concerns over rising interest rates are mounting. Both Australia and the US face the possibility of a recession, while New Zealand and Germany have already entered one. Though the downturns may be mild, they are likely to persist for some time.

Despite better-than-expected earnings reports in the March quarter, the figures still fell short when compared to those from a year or two ago.

Analysts in the US anticipate a 5.6% decline in June earnings for S&P 500 companies, according to estimates from financial data companies like Refinitiv, as reported by Reuters.

During the first quarter, year-over-year earnings for S&P 500 companies rose by 0.1%, far exceeding the initial forecast of a 5.1% drop at the start of the reporting season. This improvement was buoyed by upbeat results from major players such as Microsoft, Tesla, and Apple.

FactSet, another financial data company, projects an estimated earnings decline of -6.5% for the S&P 500 in the second quarter. If the actual decline matches this forecast, it would mark the largest earnings drop reported by the index since Q2 2020 (-31.6%).

According to FactSet, 67 S&P 500 companies have issued negative earnings per share (EPS) guidance for the June quarter, while 46 companies have provided positive EPS guidance. As of now, 10 S&P 500 companies have reported actual results for the quarter, with 9 of them exceeding EPS expectations and 6 reporting positive revenue surprises.
The second-quarter earnings season will kick off in mid-July, with major US banks leading the reporting lineup, along with streaming video giant Netflix and a few airlines and industrial companies. However, this earnings season unfolds amidst increasing speculation that the Federal Reserve has yet to reach the end of its tightening cycle.

During his Congressional testimony last week, Fed Chair Jerome Powell remarked that two more 25-basis-point rate increases are a reasonable expectation if the economy continues on its current trajectory. Unlike the UK, Australia, New Zealand, and much of Europe and Asia (excluding China), the US economy appears to be stabilising at a slow growth rate without plunging into a recession. This prompted the Fed to revise its growth forecast for the year to 1% from the previous 0.4%, while reducing its unemployment forecast for next year to 4.1% from 4.6%.

"The market has been too hopeful that the Fed can tame inflation, avoid a recession, and cut interest rates," noted Nick Raich, CEO of The Earnings Scout, an independent research firm, in a recent note. "S&P 500 EPS estimates and stock prices will need to reset lower."

Last Friday, the Dow dropped 219.28 points (0.65%) to 33,727.43, while the S&P 500 declined 0.77% to 4,348.33, and the Nasdaq shed 1.01% to close at 13,492.52. All three major averages broke their multi week winning streaks, with the S&P 500 losing approximately 1.4% after five consecutive weeks of gains and the Nasdaq experiencing its worst weekly performance since March. The Dow also fell nearly 1.7%, putting an end to three weeks of gains.

Eurozone shares fell by 3.1%, Japanese shares declined by 2.7%, and Chinese shares lost 2.5%.

Meanwhile, the ASX 200 dipped by 1.34% on Friday, bringing the weekly loss to over 2.1%. The overnight futures market suggests a small 16-point drop for the index at the opening bell.

Investors in both local and global markets remain cautious due to inflation data, heightening concerns that more rate hikes may be necessary to combat inflation.

As the second quarter comes to a close, market participants are eagerly awaiting the end-of-quarter and half-year reports for the 2022-23 financial year. Bloomberg analyst consensus estimates project a 4.4% growth in Earnings Per Share (EPS) for the ASX 200 during the 2022-23 year, followed by a 1.1% dip in the subsequent year. However, most forecasts anticipate slower earnings growth for the year ending June 30, while expecting improvements for 2024.

Typically, analysts provide earnings predictions for quarters, halves, or full financial years. However, the outlook for Australia seems uncertain, akin to a financial year divided into two parts. The first half, encompassing the December period, showcased robust performances from energy companies like Woodside, Santos, Whitehaven, and Yancoal Australia, as well as better-than-expected results from retailers and CSL.

In contrast, the second half of the financial year (the six months ending June 30) has exhibited a distinct shift. Falling oil, liquefied natural gas (LNG), lithium, other metal, thermal coal, and coking coal prices have weighed on performance. Iron ore, on the other hand, has experienced a pickup since March, surpassing $US100 per tonne. However, compared to a year ago, iron ore prices have shown limited movement.

Iron ore prices began the 2022-23 period around $US111 per tonne for the benchmark 62% Fe fines from the Pilbara, dipped to a low of just over $US75 per tonne, and subsequently recovered to $US.

LNG prices have also rebounded since the end of May, surging by a third to more than $US12 per million British Thermal Units. Nonetheless, major mining companies such as BHP, Rio Tinto, and Fortescue have faced cost pressures, along with other miners and gold companies, which are likely to impact margins for the foreseeable future.

However, the most significant uncertainty lies in the impact of declining consumer spending, particularly since March. Retailers like Best and Less, Baby Bunting, and JB Hi-Fi have reported sales declines, and retail sales overall have exhibited a significant slowdown.

The release of May's retail sales data on Thursday will provide valuable insights into the year's overall performance.


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Source: Finance News Network

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