Stock markets are braced for a “bout of heightened volatility” as the second-quarter earnings season kicks off this week, giving an insight in the health of corporate America.
The warning from Nigel Green, CEO of deVere Group, one of the world’s largest independent financial advisory, asset management and fintech organisations, comes ahead of earnings reports from the likes of BlackRock, JPMorgan Chase, Wells Fargo, and Citi.
This will be followed the week after by Tesla, Netflix, IBM, Bank of America, Goldman Sachs, Morgan Stanley, Johnson & Johnson, and United Airlines, amongst others.
The deVere Group chief executive says: “Markets are bracing for what could be the worst reporting season since the end of the pandemic.
“In the last quarterly earnings, there was a lot of negative guidance from companies. We’re likely to see this having turned out to be correct amid the brewing of a perfect storm of several major economic headwinds.
“These include the persisting challenge of inflation, meaning central banks will need to continue with, or resume, interest rate rises to bring inflation back to target; and that developed markets will experience the lag effect of monetary policy tightening during the second half of 2023.
“As companies’ costs exceed their sales, as is currently the case for many corporates, earnings take a hit.”
He continues: “With earnings being less than stellar – with some analysts saying they could be the worst since Q2 2020 – we expect a bout of heightened market volatility as investors assess the health of corporate America.
One of the main aspects of the reports that investors will be looking for this season is guidance.
“Guidance will be critical as indicators show the economy is headed for a downturn and investors will be eager to know which companies are best-positioned to manage this. Guidance helps evaluate a company’s past performance in light of its future prospects.”
Nigel Green comments: “When costs are going up, investors should increasingly be looking at a company’s and a sector’s ability to maintain margin.
“Investors should be paying close attention to margin because it can indicate how well a company is managing costs and competing in its industry.
“It can also impact a corporation’s ability to invest in growth opportunities or pay dividends to shareholders.”
Previously, he has suggested that these include energy, healthcare, luxury goods, and agriculture.
“We’ll look at energy because there’s already a shortage of energy in the world right now.
“Healthcare is a robust sector as people will always need to stay healthy – this has come into focus more than ever since the pandemic. Also, despite wider market volatility, there’s strong earnings potential due to ageing populations and other demographic changes. Plus, healthcare is becoming increasingly tech-driven, which offers fresh opportunities.”
He goes on to say: “Luxury goods can maintain margin due to the inherent aspirational ‘elite and exclusive’ aspect of the sector.
“Agriculture is another one as populations in emerging markets around the world are eating more meat. As they eat more meat, there needs to be more grain produced.”
He concludes: “The earnings reports are a critical test for the stock market rally. Investors should buckle up.”
