Financial earnings and market performance:
- JPMorgan Chase, Wells Fargo and Citigroup report Strong financial earnings, positive impact on US markets.
- American Express: Market-beating profit of $2.89 per share, $426.6 billion spending surge.
- Microsoft: Quarterly earnings of $2.69 per share, beating Zacks Consensus Estimate of $2.54 per share.
- Alphabet (Google’s parent company): Better-than-expected quarterly revenue of $74.6 billion, YouTube ads generated $7.67 billion, Google Cloud brought in $8.03 billion, 7% QoQ revenue increase.
- Meta (formerly Facebook): 11% YoY revenue growth, total revenue of $32 billion, net profit of $7.79 billion ($2.98 per share), strong engagement across apps.
Market performance:
- Dow: Increased by 1292 points (3.21%)
- S&P 500: Gained 3.46%
- Nasdaq: Rose by 2.68%.
Top-performing sectors:
- Technology
- Consumer discretionary
Factors Contributing to earnings season in July 2023
Economic Growth
Economic growth is a crucial factor that has contributed to the earnings season in July 2023. The US economy has been experiencing growth, which has positively impacted corporate earnings. A growing economy leads to increased consumer spending, higher business investments, and improved overall financial performance for companies. This, in turn, translates into better earnings reports and a positive impact on the stock market.
Several factors drive economic growth, including technological advancements, increased productivity, favorable government policies, and a stable macroeconomic environment. In the US, economic growth has been supported by a strong labor market, low unemployment rates, and robust consumer spending. Additionally, the Federal Reserve’s monetary policy has played a significant role in supporting economic growth by maintaining low interest rates and providing liquidity to the financial system.
However, economic growth can also be affected by external factors such as global economic trends, geopolitical events, and trade tensions. For instance, the ongoing pandemic, trade disputes, and currency fluctuations can influence the pace of economic growth and, consequently, corporate earnings.
In July 2023, the US economy’s growth has been a significant factor contributing to the strong earnings season. Companies across various sectors have benefited from the growing economy, leading to better financial performance and higher stock prices. As the economy continues to grow, it is expected that corporate earnings will remain strong, positively impacting the stock market and investor sentiment
Interest Rates
The Federal Reserve raised its key interest rate by 0.25% to as much as 5.5% in July 2023, the highest level in 22 years. Interest rates play a significant role in the earnings season, as they can influence corporate earnings by affecting borrowing costs and corporate profits. When the Federal Reserve raises interest rates, borrowing costs for companies increase, which can lead to lower corporate profits and negatively affect earnings reports. Higher interest rates can also impact investor sentiment, as they may cause both businesses and consumers to cut back on spending. This reduction in spending can result in lower earnings for companies and a drop in stock prices.
On the other hand, lower interest rates can stimulate economic growth by making borrowing more affordable for companies. This can lead to increased business investments, higher consumer spending, and improved overall financial performance for companies. Consequently, lower interest rates can contribute to better earnings reports and a positive impact on the stock market.
Inflation
The annual inflation rate in the US slowed to 3% in June 2023, the lowest since March 2021, and compared to 4% in May. Inflation is another factor that has contributed to the earnings season in July 2023. High inflation can impact corporate earnings by eroding the purchasing power of consumers and increasing input costs for companies. When consumers have less disposable income due to higher prices, businesses may experience lower revenues and profits, which can negatively affect their earnings reports.
Inflation can also influence investor sentiment and stock prices, as higher inflation can lead to concerns about the overall health of the economy. Investors may become more cautious in their investment decisions, which can result in lower demand for stocks and a decline in stock prices.
Macroeconomic Factors
Macroeconomic factors, such as GDP growth, unemployment rates, and retail sales, can also influence the earnings season in July 2023. A healthy and growing economy can lead to increased consumer spending, higher business investments, and improved overall financial performance for companies. This, in turn, translates into better earnings reports and a positive impact on the stock market.
However, macroeconomic uncertainty, including concerns about a potential recession in 2023 or 2024, can influence investor sentiment and corporate earnings. Investors may become more cautious in their investment decisions, which can result in lower demand for stocks and a decline in stock prices.
Sector Performance
The performance of specific sectors can impact the earnings season in July 2023. For example, technology and consumer discretionary sectors have been the top-performing large-cap sectors in Q2, driving strong earnings reports. Companies within these sectors have benefited from the growing economy, leading to better financial performance and higher stock prices.
However, not all sectors perform equally during earnings season, and some may experience weaker earnings reports due to factors such as industry-specific challenges, regulatory changes, or shifts in consumer preferences.
Company-Specific Factors
Company-specific factors, such as product launches, mergers and acquisitions, or changes in management, can impact earnings reports during the earnings season. These factors can influence a company’s financial performance, either positively or negatively, and can affect investor sentiment and stock prices.
For example, a successful product launch can lead to increased revenues and profits for a company, resulting in a better-than-expected earnings report and a positive impact on the stock price. On the other hand, a merger or acquisition that is perceived as unfavorable by investors can lead to a decline in the stock price, even if the company’s earnings report is strong.
Earnings Forecast for August to December 2023
Analysts project that S&P 500 earnings growth will rebound back into positive territory in the second half of 2023, with 0.7% earnings growth in the third quarter and 8.1% growth in the fourth quarter.
1. Global real GDP is forecasted to grow by 2.6% in 2023, down from 3.3% in 2022.
2. Inflation is expected to ease globally, with consumer price inflation likely averaging 5% in 2023 and finishing the year at a 3.5% year-on-year pace.
3. A mild recession is forecasted in the United States and Europe, but resilience in Asia Pacific will prevent a global recession.
4. The US economy is expected to continue growing at a below-trend pace of 1.8% in 2023, with a mild recession in Europe and a bumpy reopening in China.
Potential Risks and Challenges Impacting Global Market Forecast for the Second Half of 2023
- Geopolitical Tensions: Ongoing conflicts and tensions between countries, such as the Russia-Ukraine war and strained US-China relations, can create uncertainty and negatively affect global markets.
- Inflation: High inflation can erode consumer purchasing power and increase input costs for companies, leading to lower corporate earnings and potentially impacting stock prices.
- Interest Rates: Changes in interest rates, particularly if the Federal Reserve continues to hike rates, can influence borrowing costs for companies and affect corporate profits, potentially impacting stock prices.
- Economic Slowdown: A potential global economic slowdown or recession could lead to reduced consumer spending, lower business investments, and weaker overall financial performance for companies.
- Trade Tensions: Trade disputes and protectionist policies can disrupt global supply chains and negatively impact economic growth, potentially affecting the global market outlook.
- Sovereign Debt Levels: Mounting sovereign debt levels in some countries could lead to financial instability and negatively impact global markets.
Three Scenario Forecasts:
Scenario 1: Soft Landing
– Inflation gradually declines but remains above the Fed’s 2% target through end of 2023. This allows the Fed to slow the pace of rate hikes.
– GDP growth slows to around 1.5-2%, below trend but still positive. Unemployment rises slightly but remains low from a historical perspective.
– Corporate earnings growth turns positive but remains muted. Stocks see modest gains of 5-10% in 2023.
– The Fed is able to control inflation without triggering a recession. While growth is slower, the economy manages a soft landing.
– Bonds stabilize and see gains as inflation declines and the Fed pauses rate hikes. Credit spreads narrow.
This aligns with view of moderating cycles and smooth transitions between growth and slowing growth.
Scenario 2: Slowdown but No Recession
– Inflation remains stubbornly high above 5%, leading the Fed to maintain an aggressive pace of rate hikes through end of 2023.
– GDP growth slows to 0-1% as rate hikes restrain economic activity. Unemployment rises to around 5%.
– Corporate earnings decline slightly in 2023. Stocks tread water with minimal gains or losses for the year.
– While growth slows significantly, the economy avoids technical recession. However, high inflation and slow growth challenge consumer and business confidence.
– Bonds continue to struggle as inflation remains elevated. Credit spreads widen on growth concerns.
This aligns with the fact that as high inflation influences Fed policy and Fed policy in turn slows growth. It also aligns with view of volatility within cycles.
Scenario 3: Recession
– Inflation remains above 7-8% as supply chain disruptions persist. The Fed funds rate rises above 4% by end of 2023.
– GDP contracts by 0.5-1%. Unemployment rises significantly above 6%.
– Corporate earnings decline by 5-10% in 2023. Stocks fall 15-20%.
– Aggressive Fed tightening triggers recession as rate hikes restrain consumer and business activity.
– Bonds finally catch a bid as the Fed cuts rates in response to recession. Credit spreads widen significantly.
From a long-term debt cycle analysis, if high inflation and Fed tightening create a “depression-like” environment. It also represents the downswing in market cycles.
The most likely scenario depends on the path of inflation. But policymakers face challenges navigating these unprecedented conditions. Careful monitoring of economic data and indicators will be critical in forecasting outcomes.
