PACE OF FED RATE HIKES HAS BEEN RAPID IN THIS CYCLE COMPARED TO PREVIOUS ONES
After witnessing significant earnings growth in the first half of 2022, all
eyes are now on the third quarter earnings season. Markets are heading
into the earnings season on poor footing as US stocks are witnessing
heightened volatility amid concerns that the Fed's aggressive rate hikes
will result in a possible recession. Analysts will track EPS and guidance in
each sector and will likely adjust the earnings and revenue estimates for
the next few quarters.
At the end of June, analysts expected third-quarter EPS for the S&P 500
index to be 9.8% higher than last year's third quarter. However, there have
been a series of earnings downgrades over the previous three months. For
Q3 2022, analysts expect EPS growth to be just 2.9%, as they believe it
would be difficult for businesses to maintain profitability given the current
economic environment. Labour costs, supply chain disruptions, and
unfavourable foreign exchange rates are some of the major concerns
negatively impacting earnings. From an earnings contribution perspective,
we expect companies within the energy and industrial sector to be the
major contributors toward overall growth in the earnings for the index.
Currently, markets are looking at companies to provide forward guidance
for the last quarter of 2022 and CY2023. Given the host of worries, we may
see an increase in companies either withdrawing forward guidance or
lowering forward guidance which will bring further downward revisions to
earnings and revenue estimates.