As the second-quarter earnings season kicks off this week, investors want answers on the health of the United States' companies and its economy.
The projected second-quarter earnings decline for companies listed in the S&P 500 is roughly 7.6% compared to the prior year, according to FactSet. That would be the third consecutive quarter of declines and the largest earnings decline reported by the broad-based index since a roughly 32% loss during the second quarter of 2020.
But investors will be looking even more closely at what companies forecast for their financial performance and the broader economy. That will be more important than backward-looking earnings results in determining whether this year's rally can continue, and whether the economy is headed for a downturn.
"Guidance and insights into company cost structures that determine profit margins are likely to have the greatest impact on investor sentiment," US Bank Wealth Management strategists wrote in a report on Monday.
The S&P 500 has gained about 16% for the year, buoyed by hype around artificial intelligence that's driven tech stocks to stratospheric heights and an economy that's stayed resilient despite the Federal Reserve's aggressive pace of interest rate hikes.
The economy has shown little signs of slowing this year. Gross domestic product, the broadest measure of economic output, rose at an annualized rate of 2% in the first quarter, up from a second estimate of 1.3% reported last month.
Retail sales at stores, online and in restaurants increased 0.3% in May from April, above economists' expectations of a 0.1% decline, according to Refinitiv.
Some investors say the economy's strength could start to peter out as the Fed continues to raise interest rates and consumers spend savings accrued during the height of the pandemic.
"It's not a bright picture," said Paul Eitelman, chief investment strategist for North America at Russell Investments.
Retail behemoths including Macy's and Costco sent warning bells ringing around a month ago that consumers are tightening their purse strings. Moreover, the US economy added a fewer-than-expected 209,000 jobs last month, outpacing the pre-pandemic average but marking the lowest monthly gain since December 2020.
Investors will search for more signs of consumers' strength on Friday, when big banks including JPMorgan Chase, Wells Fargo, BlackRock and Citigroup report their quarterly results. Key themes in focus include how credit conditions have tightened, especially after three regional banks collapsed earlier this year, and whether it's damaged the US economy.
What's next: Despite low expectations for the second quarter, analysts still expect earnings growth of about 0.2% and 7.7% for the third and fourth quarters of this year, respectively. But of the 267 companies in the S&P 500 that have issued earnings guidance for the year so far, roughly 43% of them have issued a negative forecast.
"It's just going to be harder and harder for the consumer to remain in a position where they can support economic growth," said Steve Wyett, chief investment strategist at BOK Financial.
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