Some of the big players kick-started the earnings season today, but what does this mean for the indices?

Earnings season begins...

US earnings are to weaken in the third quarter of the year, with the biggest cut in forecasts in two years. But how will this affect the indices?

2022 Q3 projected to weaken

The earnings season started today (Friday 14th October) as the major players such as JPMorgan, Morgan Stanley, Wells Fargo and a few other have already released their results for Q3. Looking at the S&P 500, the growth rate as of early October will be 2.9% from the data gathered by FactSet. If this rate appears to be accurate, this will be the lowest reported rate since the third quarter of 2020. The YoY growth rate is still positive; however, it does not reflect the weakening outlook of the global economy (Bloomberg.com).

Earnings forecast reductions reach highest level in 2 years

A mixture of rising inflation and higher interest rates has led to businesses and consumers spending less. Latest poor economic data, while still hovering over recession territory for the time being, suggests that the worst is yet to come for the US and rest of the economies.

Earnings expectations have decreased by 6.6% between June and September. The traditional quarterly cut is about 2.3%, a clear sign that investors remain cautious about the outlook for earnings in Q3. Data gathered by FactSet demonstrates that communications services, materials and consumer discretionary sectors have seen double-digit falls in forecast. While the energy sector is the only one that has seen earnings estimates increase over the quarter, up 7.9% (FactSet.com).

Stocks to suffer further declines

Usually, stock markets are driven by earnings and by earnings forecasts. A gradual increase in earnings helped the S&P 500 index to reach its all-time high in the post-pandemic era. The S&P 500 reached 4817 in January 2022 (record high). Since then, it has fallen by 20%, hitting a low below 3600 towards the end of last month (prorealtime.com).

Even though the index has bounced back since then, it seems likely that this will be overturned in weeks and months to come. Further declines in earnings and their expectations should prompt this fall, market analysts estimate that the pre-pandemic high at 3397 is now the clearest downside target (prorealtime.com).

The huge declines in earnings forecasts and earnings in general, combined with further estimated declines for the fourth quarter of 2022, point towards a wider bearish outlook for the S&P 500 and other indices.