Investors, worried about the recession, will scrutinize the results for any guidance from Wall Street’s most powerful leaders on the state of the economy.
“The key thing to look for is reserves,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, referring to the liquidity financial institutions need to have on hand to meet central bank requirements. “The amount they are reserving will show how concerned they are about a recession. This will be data that will be closely watched by analysts and investors, that is very important.”
Analysts expect overall S&P 500 earnings to rise 5.6% in the second quarter, down from 6.8% expected in early April, according to data from Refintiv. This would mark the slowest quarter of growth since the fourth quarter of 2020.
This estimate of 5.6% is also inflated by the energy sector, which benefited greatly from the increases in the price of crude oil this quarter. Energy profits are expected to jump 205%, according to analysts at the Wells Fargo Investment Institute. Without energy, S&P’s overall earnings would fall 2%.
Financials, a sector that includes big banks, will likely feel the burn based on tough comparisons to last year, including the release of loan loss reserves, wrote Chris Haverland, strategist at the Wells Fargo Investment Institute, in a recent note. He puts the sector’s earnings per share growth in the second quarter at an alarming -22%.
JPMorgan is expected to post earnings of $2.94 per share, according to Refinitiv data, up from $3.78 a year ago. Citigroup is expected to report EPS of $1.69, down from $2.63 last year, and analysts expect Wells Fargo to post earnings of $0.85 per share, down from $1.38 in the second quarter of 2021 .
But investors have already priced in those declines, Ghriskey said, and barring any surprises, there shouldn’t be any major market swings.
JPMorgan shares are down almost 30% since the start of the year. Citigroup fell 26% and Wells Fargo 22%.
“There’s not a lot of investment banking work going on right now. They’re not making a lot of money trading stocks. Home sales are weak,” he said. “It’s very typical of a Fed rate hike cycle and it argues for the potential for a real recession later this year or next year.”
Hot jobs and a warmongering Fed
Recession fears abound as interest rates rise, oil and gas prices rise and mortgage rates fall. One constant: the state of the labor market remains solid.
All of this sends a clear message to the Federal Reserve, analysts say: Keep on going.
“Today’s jobs report does not support the argument that we are currently in a recession and shows that the labor market is strong enough to withstand further interest rate hikes,” Frank wrote. Steemers, senior economist at the Conference Board, in a note Friday.
Members of the Federal Reserve are meeting later this month to consider whether further interest rate hikes to fight inflation are warranted. In the latest minutes of the meeting, members said they would likely raise interest rates by half a percentage point to three-quarters of a point in July.
The market is pricing expectations for a three-quarter point rise at more than 95%, according to the CME tool Fed Watch.
“The better-than-expected jobs report appears to pave the way for a further 0.75% rate hike by the Fed, as widely expected,” said Jim Baird of Plante Moran Financial Advisors. “With inflation still going strong, an unexpectedly sharp drop in labor conditions might be the only thing preventing aggressive tightening as the Fed plays its catch-up. It may still happen, but it hasn’t yet.”
According to projections taken at the last Fed meeting earlier this month, central bankers expect the jobless rate to end this year at 3.7%, rise to 3.9% next year and reach 4.1% in 2024. But for now, the unemployment rate remains at 3.6%.
Monday: FOMC member John Williams speaks
Tuesday: PepsiCo reports second quarter results
Wednesday: June Consumer Price Index
Thursday: JPMorgan Chase reports second quarter results
Friday: BlackRock, Citigroup and Wells Fargo report second quarter results