When some of Japan’s major banks announce their quarterly results on Friday, the third quarterly earnings reporting period will begin in earnest.
Wall Street expects profits to rise 4.7%, marking the fifth consecutive quarter of increase from a year ago. However, compared to the same period last year, this will be the slowest growth since the fourth quarter of 2023.
Binky Chadha, chief equity strategist at Deutsche Bank, said the S&P 500 Index (^GSPC) has fallen by a typical 2% in the first four weeks of reporting, given that stock prices between reporting periods were higher than usual. I don’t expect it to rise.
“Earnings season is typically positive for stock prices, but market reaction has been muted due to strong gains and sustained above-average positions,” Chadha said in a note to clients.
Simply put, Chadha and other Wall Street strategists are wary of a growing list of other headlines that will continue to capture investors’ attention over the next month. Rising tensions in the Middle East are causing commodity prices to soar. With the presidential election looming, further instability is expected. And the current trajectory of the economy, and what it means for the Federal Reserve to cut interest rates, remains hotly debated.
All of this, along with questions about whether the stimulus-driven rise in Chinese stocks is sustainable, “will continue to exist.” [to] “This earnings season has seen the macro and its highly uncertain uncertainties being exaggerated over the micro,” said Evercore ISI’s Julien Emanuel.
Emanuel said in a note to clients on Sunday that election year earnings season typically does not lead to further stock price gains in the short term. Emanuel said the past four election cycles dating back to 2008 have resulted in negative returns for the S&P 500 index in October.
“In the election-period earnings season, stock prices have been less responsive to sales than usual.” [and earnings per share] This shows the impact elections have on stocks,” Emanuel wrote.
Aside from other risks to the market, part of the bull market story has strategists wary of investors getting too excited outside of earnings season. Scott Kronert, equity strategist at Citi, wrote in a note to clients on Monday that he expects a better-than-usual earnings backdrop going into the reporting period relative to Wall Street expectations and fewer downward revisions than normal. .
However, it’s important to note that investors are already paying for a better-than-average return trend.
“The bar is high,” Kronert wrote. “Both index multiples are in the top decile. When you take our implicit growth framework together, there is little margin for failure. Neither necessarily screams ‘sell,’ but historically, the upside Both prices have been accompanied by unstable market movements.
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Still, strategists believe there may be positive catalysts from this earnings season and lessons for investors to consider moving forward. Going into the reporting period, 72% of companies expect their profits to increase year over year, the highest percentage since the fourth quarter of 2021, according to U.S. and Canadian equity strategists at Bank of America Securities. This could be another sign that the range is “continuing to improve.” Oh Sung Kwon.
For Kwon, this earnings season will be all about the outlook companies provide and what the Fed’s interest rate cuts mean for their businesses.
“Now that the easing cycle has begun, what are companies going to say about…early signs of improvement given the low interest rate environment?” Kwon said.
The Wall Street entrance to the New York Stock Exchange (NYSE) seen on November 15, 2022 in New York City. Reuters/Brendan McDiarmid/File photo (Reuters/Reuters)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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