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The S&P 500 index fell by 2% in the last week ended on April 14, 2022. It means, the flagship stock market index has now fallen 7.54% year to date and this tepid performance is likely to continue in the near term.
The key catalyst which will impact equity investors in the next four weeks is corporate earnings for Q1 of 2022. However, market participants will also have to consider the impact of macro-economic events that include inflation, rising interest rates, higher commodity prices, supply chain disruptions, and the ongoing war in Ukraine.
It will be interesting to see the management comments on how these issues will impact revenue and earnings for enterprises in Q2 and beyond.
In addition to macro events, the National Association of Home Builders will also release their survey on Monday while housing starts data and existing home sales data will release in the following days. Additionally, manufacturing and services PMI surveys will be issued on Friday.
IBM, Netflix, and Verizon will report Q2 earnings next week
In an interview with CNBC, the chief equity strategist Jonathan Golub at Credit Suisse, “I think the market is so focused on the Fed and inflation and everything else that stocks will have a very weak response to earnings. I think the market is going to trade up, but the market is not going to give companies full credit.”
The seven companies part of the Dow Jones Industrial Average Index reporting Q1 earnings in the next week include IBM (NYSE: IBM), Johnson and Johnson (NYSE: JNJ), Verizon (NYSE: VZ), American Express (NYSE: AXP), Dow Inc (NYSE: DOW), Travelers (NYSE: TRV), and Procter and Gamble (NYSE: PG).
Further, tech companies such as Netflix (NASDAQ: NFLX) and Snap (NYSE: SNAP) as well as leading electric vehicle manufacturer- Tesla (NASDAQ: TSLA) are all scheduled to report earnings in the next five days.
Most analysts expect corporate guidance for the rest of the year to be less than encouraging due to cost pressures which will be reflected in the compression of profit margins.
Analysts forecast S&P 500 earnings to increase 6.3%
Wall Street expects earnings to increase by 6.3% year over year in Q1, based on data compiled by Refinitiv. Companies part of the energy sector should, however, benefit from rising oil prices and are well-positioned to outpace the broader market.
Alternatively, earnings for banking companies should experience a steep decline. For example, JPMorgan’s adjusted earnings in Q1 fell to $2.63 per share compared to $4.5 per share in the year-ago period.
Last year, JPMorgan and its peers benefitted from higher earnings due to the release of pandemic-related allowances for credit losses. These reserves were accumulated at the beginning of COVID-19 to offset the possibility of higher delinquency rates. But these reserves should wind down in upcoming quarters.
Growth stocks should continue to underperform as treasury yields gain momentum making capital borrowing an expensive process. The 10-year Treasury yield rose to 2.83% on Wednesday compared to 2.7% on April 8.
There is a good chance for companies part of recession-proof sectors such as consumer staples and healthcare to derive outsized gains going forward. On the other hand, economically sensitive sectors such as financials, construction, and transportation might experience a downtrend, which suggests investors are wary of slowing growth in an inflationary environment.
While the risk of a full-blown economic recession might be unlikely, global economic growth will slow down in 2022.
Related: Super-hot Inflation Unsettles Markets and Oil Marches Back Up on Ukraine Fears