Stocks Face Brutal Earnings Season With All Eyes on Apple, Investors Say

(Bloomberg) — Investors expect this earnings season to push stocks even higher and look to Apple Inc. in particular as a gauge of global economic conditions.

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More than 60% of the 724 respondents to the latest MLIV Pulse poll say this earnings season will bring down the S&P 500. That means there’s no end in sight for stocks’ dismal run, after ‘a drop on Friday that decisively dashed hopes that the eye-catching two-day rally earlier last week would be the start of something bigger. About half of survey participants also expect equity valuations to decline further from the average over the past decade.

The results underscore Wall Street’s fear that even after this year’s brutal selloff, stocks have yet to price out all the risks from aggressive central bank tightening as inflation remains stubbornly high . The outlook isn’t likely to improve anytime soon with the Federal Reserve firmly on the hook for rate hikes, likely weighing on growth and profits in the process. Data on Friday showed that the US labor market remains strong, increasing the chances of another Fed rate hike next month.

“Earnings in the third quarter will disappoint with clear downside risks to analyst estimates for the fourth quarter,” said Peter Garnry, head of equity strategy at Saxo Bank A/S. “The key risks to third-quarter earnings are the cost-of-living crisis affecting demand for consumer goods” and higher wages affecting corporate profits.

The U.S. earnings season begins in earnest this week with results from major banks, including JPMorgan Chase & Co. and Citigroup Inc., which will offer investors the opportunity to meet some of Corporate America’s most influential leaders.

Look at Apple

In terms of stocks to watch in the coming weeks, 60% of respondents see Apple as crucial. The iPhone maker, which has the largest weighting in the S&P 500, will provide insights on a number of key topics, including consumer demand, supply chains, the effect of the rising greenback and rates higher The company reports on October 27. JPMorgan got the second-highest mention at 25%, but Microsoft Corp. and Walmart Inc. they also got a remarkable number of votes.

The reporting session begins with the S&P 500 down 24% this year, on pace for its worst performance since the Great Financial Crisis. Against this gloomy backdrop, nearly 40% of survey participants are inclined to invest more in value stocks, compared with 23% for growth, whose profit prospects are vulnerable when interest rates rise interest Still, 37% chose none of these categories, perhaps reflecting the view of Citigroup’s quantitative strategists that equity markets have “turned decidedly defensive” and are just beginning to reflect risks of a recession.

US stocks have had a horrible year, but so have other financial assets, from Treasuries to corporate bonds to crypto. The 60/40 balanced portfolio that mixes stocks and bonds in an attempt to protect against strong market moves in any case has lost more than 20% so far this year.

Fears of inflation

Respondents expect references to inflation and recession to dominate earnings calls this season. Just 11% of participants said they expected CEOs to utter the word “trust,” underscoring the gloomy backdrop.

“I expect more cautious and negative guidance on the basis of broad economic weakness and uncertainty and tighter monetary policy,” said James Athey, chief investment officer at abrdn.

About half of respondents see stock valuations deteriorating further in the coming months. Of these, 70% expect the S&P 500’s price-to-earnings ratio to fall to a 2020 low of 14, while a quarter see it falling to a 2008 low of 10. The index is currently trading at around 16 times forward earnings, below. the average of the last decade.

Rough Outlook

Wall Street has an equally dim view. Citigroup strategists expect a 5% contraction in global earnings by 2023, consistent with below-trend global economic growth and high inflation. The bank’s index of earnings revisions shows that downgrades outpace upgrades in the US, Europe and the world, with the US experiencing the deepest downgrades. Strategists at Bank of America Corp. expect a 20% decline in European earnings per share by mid-2023, while peers at Goldman Sachs Group Inc. they say Asia ex-Japan stocks may see further declines in earnings amid weak macro and industrial data.

For all the pessimism, there is room for positive surprises ahead. According to strategists at Bloomberg Intelligence, third-quarter reports are likely to beat expectations for reduced earnings. Meanwhile, at Barclays Plc, strategists led by Emmanuel Cau said the results were unlikely to be a “disaster” due in part to still high nominal growth, but doubted the outlook was constructive.

“Earnings estimates for 2023 have started to decline, but they need to decline further. Estimate revisions are a necessary part of building a durable fund in equity markets,” said Madison Faller, global strategist at JPMorgan Private Bank. “As estimates come down, investors will be eager to get more involved in anticipation of a possible pause in the Fed’s hiking cycle.”

Join us on October 11th at 10am New York time to discuss the survey results with Amy Kong, Chief Investment Officer of Barrett Asset Management, and Kim Forrest, Founder and Principal of Bokeh Capital Partners investments.

To subscribe to MLIV Pulse stories, click here. For more market analysis, check out the MLIV blog.

(Updates with TV clips under the fifth and 14th paragraphs.)

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