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LGT Navigator: Earnings season poses next trial for stock markets

April 12, 2022

In an already volatile market environment, the first US companies are presenting their quarterly figures this week. Meanwhile, rising interest rates and economic worries are sending stock markets on a tailspin. Inflation data from the US could cause further turbulences today. They will be published in the afternoon. 

Earnings season

Economic worries and rising interest rates have resulted in weak start to the new week for stock exchanges. Strict lockdown measures in China have caused production cuts in economic centers such as Shanghai and fueled consumer prices in the People's Republic. China is currently experiencing the most severe corona wave since the outbreak of the pandemic. If growth in the world's second-largest economy cools down, this is likely to have consequences for the global economy as well. The uncertainty was also felt in the energy markets, where crude oil fell by around -4% on Monday. Loretta Mester, president of the Federal Reserve Bank of Cleveland, said the situation in China could again exacerbate problems in global supply chains, further fueling US inflation. The latest figures on US inflation will be published this afternoon.

Meanwhile, US government bond yields have continued to rise. Ten-year US Treasuries yielded as much as 2.78% on Monday, the highest since January 2019. The recent jump in yields is being driven by the imminent aggressive tightening of monetary policy the Fed has announced in order to curb inflation. Thus, investors will scrutinize consumer price trends closely.

Technology stocks, which are likely to suffer significantly from rising interest rates, once again recorded the biggest losses on US equity markets. The Nasdaq Composite lost on Monday -2.2%. The S&P 500 declined -1.7% and the Dow Jones fell -1.2%. Asian stock markets are also down again after the significant losses of the previous day. The Hang Seng loses -0.8% in Hong Kong and the Shanghai Composite sheds -0.7%. In Tokyo, the Nikkei loses -1.8%.

Kick-off to the earnings season

The next acid test for stock markets is already imminent, as Wall Street kicks off the first quarter earnings season this week. Traditionally, the big US banks lead the way, with JPMorgan Chase presenting its figures on Wednesday, followed by Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo on Thursday. Investors are eagerly awaiting the quarterly statements to get a sense of how companies are coping with rising costs as everything from wages to materials to energy has increased in price since the start of the year. In this market environment, companies that are in the position to pass on at least part of the price increase to their customers stand to benefit. Margins will therefore be of particular concern.

The data service provider FactSet estimates that S&P 500 companies will report a profit margin of 12.1% for the first quarter on an aggregate basis. That's down slightly from previous quarters, but still above the five-year average of 11.2%. Corporate profits are expected to rise +4.5% year-on-year, FactSet calculates. This, after climbing more than +31% in the final quarter of 2021. However, the differences between the individual sectors are likely to be significant. While the energy sector could almost triple its profit year-on-year, the financial sector will have to prepare for a decline in profits, analysts predict.

Russia faces bankruptcy

The danger of Russia going bankrupt has increased significantly in recent weeks: the country has violated its payment obligations and settled outstanding debts in rubles instead of in US dollars as planned. As a result, the rating agency Standard & Poor's (S&P) has downgraded Russia's credit rating again, lowering it to “selective default”. Moscow now has thirty days to meet its obligations after all. At the same time, S&P is discontinuing its credit rating of Russia, following the example of the rating agencies Moody's and Fitch. The agencies are thus implementing the EU sanctions, which prohibit them from continuing to rate Russia's creditworthiness. 

Because of the Western sanctions, the Kremlin's access to the capital market is severely restricted, and Russia's foreign exchange reserves are also largely blocked. Russian Economy Minister Anton Siluanov said in a recent interview that Russia would not place any more government bonds this year, citing high borrowing costs. However, Siluanov assumes that Russia will be able to cover current government expenditures through revenues from the sale of energy. The EU alone pays 1 billion euros a day for oil and gas supplies.  


Economic Indicators April 12

MEZ Country Indicator Last period
08:00 DE Consumer price index (March, m/m) +2.5%
11:00 EZ ZEW economic expectations (April) 38.7
14:30 US Consumer price index (March, y/y) +7.9%


Earnings Calender April 13

Country Company Period
CH Barry Callebaut  Q2 2022
US JPMorgan Chase  Q1 2022


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