Investors are bracing themselves for a period of increased market volatility as the second-quarter earnings season commences this week, offering insights into the overall health of corporate America.
Market experts issue this warning ahead of earnings reports from major players such as BlackRock, JPMorgan Chase, Wells Fargo, and Citi. Following closely will be reports from Tesla, Netflix, IBM, Bank of America, Goldman Sachs, Morgan Stanley, Johnson & Johnson, and United Airlines, among others.
Nigel Green, CEO of deVere Group, one of the world's largest independent financial advisers, states, "Markets are preparing for what may be the most challenging reporting season since the pandemic's end." In the previous quarter, numerous companies issued negative guidance, which is expected to prove accurate as several significant economic headwinds converge.
These headwinds include the ongoing challenge of inflation, necessitating central banks to either maintain or resume interest rate hikes to curb inflation and resulting in developed markets feeling the lag effects of tightened monetary policies in the second half of 2023.
With companies facing higher costs than sales, as is presently the case for many, earnings are likely to suffer. Given the underwhelming earnings expectations, with some analysts predicting the worst performance since Q2 2020, heightened market volatility is anticipated as investors assess the condition of corporate America.
Guidance will be a crucial aspect that investors closely scrutinize this season. As economic indicators point towards an impending downturn, investors seek insight into which companies are best equipped to weather the storm. Guidance enables the evaluation of a company's historical performance in light of future prospects.
Nigel Green emphasizes the importance of margins during times of rising costs. He suggests investors pay close attention to a company's ability to maintain margins, as it indicates effective cost management and competitiveness within the industry. Margins also impact a company's capacity to invest in growth opportunities and reward shareholders with dividends.
Industries highlighted by Green include energy, healthcare, luxury goods, and agriculture. Energy is a critical area due to the existing global energy shortage. Healthcare remains robust, given the enduring need for wellness, particularly accentuated during the pandemic. Additionally, healthcare benefits from earnings potential stemming from aging populations and demographic shifts, coupled with an increasing reliance on technology within the sector.
Luxury goods can sustain margins due to the sector's inherent allure of exclusivity and aspiration. Agriculture is also promising, as emerging markets witness a rise in meat consumption, driving the need for increased grain production. The forthcoming earnings reports serve as a pivotal test for the ongoing stock market rally, requiring investors to brace themselves for potential turbulence.
