Earnings season for Q3 starts in earnest this week with the traditional curtain-raiser of big bank results. JPMorgan Chase (JPM), Citi (C) and Wells Fargo (WFC) all weigh in with numbers on Friday. But analysts and investors are not looking for bullish numbers that can give the overall market a boost, with expectations for earnings per share growth consistently coming down into reporting season and an overall sense that the broader market will react badly.
Downward revisions: Third-quarter S&P 500 (SPY) EPS growth is now expected to be 2.6%, down from 9.8% in July, according to FactSet. Analysts have cut profit forecasts by $34B and if the consensus is correct, it would be the worst quarter for bottom lines since Q3 2020, in the depths of lockdown, the FT reported.
What does that mean for stocks? According to the latest MLIV Pulse survey of investors, more than 60% believe this earnings season will push the S&P 500 lower. Among the more than 700 respondents, high-level asset allocators are the most pessimistic about the impact of earnings, while risk managers are the most optimistic.
The BlackRock Investment Institute said it thinks earnings estimates still look “optimistic.” It remains underweight U.S. equities “valuations have not come down enough to reflect weaker earnings prospects.”
“If we are headed into a recession next year, which seems highly probable, earnings uncertainty may replace rate pressure as the chief obstacle to higher equity prices,” MKM strategist Michael Darda wrote. “Thus, the next 10 months could be tricky.”
“Long-term investors should thus have time to build long positions into weakness and volatility during the quarters ahead,” Darda said. “Forward and trailing operating earnings for the S&P 500 have typically fallen 15%-20% in recessions. So far, estimates have peaked and plateaued rather than cratered. However, forward indicators do point to more weakness ahead.”
Key stocks to watch: Apple (AAPL) results will be the most crucial to the market, with 60% of MLIV survey respondents calling it the company that matters most this earnings season. That was followed by JPMorgan at 25% and Tesla (TSLA) at 6%, with Microsoft (MSFT) and Walmart (WMT) generating a significant number of votes, according to Bloomberg.
While shares of Apple have declined fairly steadily since the middle of August, they have managed to stay off the lows around $130 hit in mid-June. At the end of September, the 200-day moving average briefly crossed below the 50-day in a bullish signal. Demand for the iPhone 14 has been questioned and will be closely watched when the company reports. In the last three months, there have been 23 downward EPS revisions vs. 14 upward revisions, giving it a Quant Rating grade of C. BofA recently downgraded the stock to Neutral and SA contributor Albert Lin noted that while Apple is a great business, the stock isn’t always “a no-brainer.” Overall pessimism isn’t universal, though. J.P. Morgan’s data assets and alpha group team said that given “the slew of negative pre-announcements, the hurdle to beat earnings is low.”
“Almost universally, people expect Energy (XLE) earnings to be great and every other sector to be horrible,” they said. “Our view is that earnings will come in better than expected and will not act as a headwind for markets.” (2 comments)
Banks led by Morgan Stanley may lose about $500M in their effort to fund Elon Musk’s $44 billion purchase of Twitter (TWTR) as the debt markets have seized in recent months. Lenders including Morgan Stanley (MS), Bank of America (BAC), Barclays (BCS) and Mitsubishi UFJ originally committed $13B of debt financing for the transaction.
Those banks may now lose about $500M if they had to sell the debt now, according to Bloomberg calculations. They originally agreed to fund the purchase even if they couldn’t sell the debt and now it’s unlikely investors would want to buy the debt in the current markets. (63 comments)
Tesla (TSLA) sold 83,135 China-made vehicles in wholesale in September, smashing its record of monthly sales in China, according to a report released Sunday by the China Passenger Car Association (CPCA). The number marks an 8% increase from August and outpaced the more than 5% month-over-month growth of all wholesale electric vehicle sales in China, according to CPCA data.
It set a record for Tesla’s Shanghai factory since production began in December 2019, and topped the prior sales record of 78,906 in June, as the U.S. carmaker continues to invest in China production. (21 comments)
Netflix (NFLX) had the most-streamed program of the week – stop us if you’ve heard that one before – but there was plenty of streaming viewing to go around, as several platforms logged hits and eyeballs.
A new season of Cobra Kai, its fifth, put Netflix back on top of Nielsen’s latest weekly streaming ratings (for Sept. 5-11), with 1.737B minutes streamed. But for the first time, Nielsen notes, four different streaming platforms had a billion-minute program. (11 comments)
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