The Strategist

Reporting time

This week marks the start of the second quarter earnings season in the US. The financial statements will show how companies are doing in the current difficult market environment. We expect volatility to increase. 

Thomas Wille
Tempo di lettura
10 minuto
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This week marks the start of the second quarter reporting season and, as always, the big US banks are kicking things off. The usefulness of the companies' interim reports, and whether they are of any use to investors in the long run, is almost a matter of faith. Proponents point to greater transparency, but there is a price to pay. Specifically, management tends to be less entrepreneurial because it does not want to disappoint analysts in the short-term. Nevertheless, in our experience, these two to three weeks are a good indicator of where the market as a whole and individual sectors might be heading.

The starting point

Our analysis is based on the S&P 500 US equity index, but other popular indices such as the Stoxx 600 or the MSCI World can also be used. Wall Street companies, and indirectly analysts, are known for lowering expectations in the run-up to a reporting period to the point where low guidance can be beaten. For the upcoming reporting period, expectations have hardly been lowered, especially when comparing the second quarter of 2023 with the long-term average. In our view, this is a clear indication that the feared earnings recession has not materialised, at least in the first half of 2023. Estimates have been revised downwards, but they have not collapsed as they did after the Covid-19 pandemic or the financial crisis 15 years ago.

Price reaction and outlook

From the end of July, when US stock market heavyweights Apple, Alphabet, Amazon and Microsoft report their earnings, things will get exciting. After the strong rally in the first half of the year, it is time for big tech to deliver. Once again, the reaction to the earnings will be key. It is quite possible that even if a company meets expectations, stock prices will still be lower as market participants anticipate an over-performance. Just as important is the outlook for the rest of the year, which can also have a significant impact on the immediate stock price reaction. We will see which companies are able to maintain sales and margins in the current difficult macroeconomic environment, which is characterised by weak growth and continued price pressure. It will show which business models are able to adapt to the new circumstances.

Rising volatility

In our view, current market volatility at index level is too low for the challenges posed by the economic environment and restrictive monetary policy. We expect volatility to increase in the coming weeks due to the reporting season. In the run-up to the upcoming earnings season, long-term investors should review the risk of individual positions and rebalance out of stocks that have risen strongly.