Friday's Market Minute: Corporate Earnings Outlook Depends On How the Economy Evolves

Friday's Market Minute: Corporate Earnings Outlook Depends On How the Economy Evolves

Economic recession talk remains the focal point on Wall Street this week, which means whatever stock market rebounds emerge will probably be short-lived. The second day of testimony from Fed Chair Powell confirmed that they are data-dependent and completely committed to bringing down inflation. Powell wants to bring down inflation and preserve the labor market recovery, which will prove the be difficult. The Fed is locked in on the position to stick to its course of beating inflation even at the expense of recession and job losses.

Equities have been relatively stable since the FOMC meeting last week, and the two-year Treasury yield, which closely tracks interest rate expectations, fell to its lowest point in two weeks after an impulsive thrust higher following May’s CPI report. Broad equity indices have yet to recover from the early June cascade sell-off, so bears are still in control. If the June 17th lows are breached, the outlook for the next level of support for the S&P 500 is around the 200-week moving average hovering near the 3,500 level.

Buyers will eventually step in with force and push the market higher in a broad multi-week countertrend rally, but risks remain. With equities in bear market territory and valuations having contracted, the greatest risk to equities now comes from actual earnings falling short of current expectations.

Despite higher interest rates, inflation, and recession fears hanging over markets, stock analysts’ forecasts point to uninterrupted gains in earnings this year and 2023. This means that forward equity multiples have contracted due to price, not from a change in the forward earnings outlook. If the aggregate forward earnings outlook begins to contract this earnings season, what may appear in price to be a cheap market may turn out to still be expensive.

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