Peak Earnings Season, The Fed & Jobs

The second busiest week of earnings season gives way to the busiest week, with 168 S&P 500 companies reporting. 52% of S&P 500 companies have reported results so far, with 71% and 68% exceeding consensus earnings and sales estimates, respectively. The S&P 500 rose by 4% for the week and almost 9% over the last two weeks.

Blended earnings, which combine actual with estimates of companies yet to report, remain lower than forecasts at the end of the quarter but made up ground last week. Six sectors, including energy, industrials, real estate, consumer discretionary, consumer staples, and healthcare, are expected to post higher earnings than expected on September 30th.

The most significant increase in blended earnings for the week was in the energy sector, with positive earnings surprises from Exxon Mobil (XOM) and Chevron
). On a related note, regulatory filings showed that Berkshire Hathaway
continued to buy shares of Occidental Petroleum
(OXY) in the last week of September and now owns about 21% of the company. A previous piece discussed why Warren Buffett’s Berkshire Hathaway could be adding to its holdings in Occidental Petroleum. The communication services and industrial sectors were the principal negative contributors to week-over-week earnings. Boeing
(BA) posted a significant loss, which dragged the expected earnings growth rate substantially lower. Earnings disappointments from Alphabet (GOOGL) and Meta Platforms
(META) dented the growth rate for the communication services sector.

Seven sectors, energy, technology, consumer staples, healthcare, utilities, and financials, now have better blended sales estimates than at the end of the quarter. Revenues have had a tailwind from inflation, making it easier to exceed expectations at the end of the quarter versus the inflation headwinds for earnings due to increased costs. Sales in the energy sector illustrate the robust increase in energy prices. The only S&P 500 sector with stock price gains year-to-date is energy, though utilities, consumer staples, and healthcare are inching closer after the robust rally over the last two weeks.

So far, the blended earnings performance has underperformed expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter improved to 2.2% year-over-year, below the expectation of 2.8% at the end of the quarter. Expected earnings growth for the calendar years 2022 and 2023 moved lower again this week.

In addition to an active earnings week, the Federal Reserve (Fed) meets on Wednesday. There is little suspense that the Fed will hike short-term interest rates by 75 basis points (0.75%). The genuine interest will be in any clues as to how aggressive the Fed thinks it still needs to be to fight inflation. The easing in expectations for hikes in the one-year forward Fed Funds rate and the resultant declines in yields for the two and ten-year Treasury probably allowed stocks to stage their recent rally. Last week, the first release of third-quarter U.S. GDP showed better-than-expected headline growth at 2.6% after two straight quarters of economic contraction. However, signs point to economic growth decelerating. A recession forecasting model from Bloomberg Economics has a 100% recession probability in the next twelve months.

Though it comes on Friday after the Fed meeting has already concluded, the monthly jobs report will be crucial for the outlook. Consensus expectations call for nonfarm payrolls to rise by 190,000, down from 263,000 in September, with the unemployment rate rising slightly to 3.6%. In addition, average hourly earnings are expected to moderate to 4.7% year-over-year from 5.0%. Some weakening in the labor market is key to allowing the Fed to at least begin to reduce the size of the rate hikes.

Despite the elevated odds of an impending recession, the more economically sensitive cyclical stocks have been outperforming the more economically resilient consumer staples stocks. The cyclical versus staples relationship will be worth watching since it is close to its recent highs of early October, where it and stocks overall were turned back previously.

Historically, waiting for better financial data to invest in stocks has been a poor strategy. Stocks tend to eventually move higher in advance of better economic data, while earnings estimates are still falling. In addition, the initial move higher tends to be explosive.

Time will tell if the current rally is a beginning of a new bull market or another bear market rally, but it is close to the typical duration and severity of past bear markets. Historically, bear markets have lasted about a year to reach the low. The current bear market began in January, so it has been about three-quarters of a year. The typical bear market decline from the peak has been almost 30 percent. If the October low holds, the S&P 500 will have declined by over 25 percent from its high.

With over half of companies reporting, headline earnings remain below estimates at the end of the quarter. Actual results have been improving and should outpace forecasts by the end of the earnings season, providing a nice treat. Given the unsettled economic outlook, forward guidance from companies will remain crucial. The Fed meeting and the jobs report will determine if Halloween week provides a trick or treat to investors.

Read More: Peak Earnings Season, The Fed & Jobs

2022-10-30 04:45:00

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