Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

Earnings season preview: weakness to continue into Q3

US earnings are expected to weaken into Q3, with the reduction in forecasts the largest in two years. Will this put further pressure on the S&P 500 and other indices?

Source: Bloomberg

Q3 earnings expected to weaken

Earnings season for the third quarter begins on 14 October, when JPMorgan and other big US banks release their figures for Q3.

Data from Factset suggests that, as of early October, the growth rate for S&P 500 earnings will be 2.9%. If this is the actual rate for the period, it will be the lowest reported since Q3 2020.

This year-on-year growth rate is still positive, but it nonetheless reflects the weakening outlook the global economy.

Earnings estimates cuts hit highest level in two years

At least two-thirds of the S&P 500 are expected to see a downturn in earnings for the third quarter.

A combination of higher interest rates and rising inflation has meant that consumers and businesses are spending less. Recent poor economic data, while still skirting recession-territory for now, nonetheless suggests that the worst is yet to come for the US and global economies.

Earnings estimates have declined by 6.6% between 30 June and 29 September. The usual quarterly cut is around 2.3%, a clear sign that analysts remain conservative about the outlook for earnings this quarter.

Source: FactSet

Factset data shows that only the energy sector has seen earnings estimates increase over the quarter, up 7.9%, while the materials, communications services and consumer discretionary sectors have seen double-digit declines in estimates.

Stocks to endure further falls

Ultimately, stock markets are driven by earnings, and by earnings estimates. A steady rise in earnings helped the S&P 500 to rise to a record high in the post-pandemic era.

The decline in earnings and earnings estimates this year, and further expected declines for Q4 2022, point towards a broader bearish outlook for the S&P 500 and other US indices.

The S&P 500 reached a record high on 4 January at 4817. Since then it has fallen by 20%, hitting a low below 3600 at the end of September.

While the index has rebounded since then, it seems likely that this will be reversed in due course. Further declines in earnings and earnings expectations should drive this fall, and the pre-pandemic high at 3397 now the most obvious downside target.

Source: ProRealTime

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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