Investors, worried about recession, will be scrutinizing the results for any guidance from Wall Street’s most powerful executives on the state of the economy.
“The key thing to look for is the reserves,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, referring to the cash that financial institutions must have on hand to meet central bank requirements. “How much they’re reserving will show how concerned they are about a recession. That will be data that will be closely watched by analysts and investors alike, that’s very key.”
Analysts expect overall S&P 500 earnings to grow by 5.6% in the second quarter, down from an expected 6.8% at the start of April, according to Refintiv data. That would mark the slowest quarter of growth since the fourth quarter of 2020.
That 5.6% estimate is also inflated by the energy sector, which has benefited greatly from jumps in the price of crude oil this quarter. Energy earnings are expected to jump 205%, according to analysts at Wells Fargo Investment Institute. Without energy, overall S&P earnings are expected to fall by 2%.
Financials, a sector that includes the big banks, will likely feel the burn based on tough comparisons to last year, including the release of loan loss reserves, wrote Chris Haverland, a strategist at Wells Fargo Investment Institute, in a recent note. He clocks the sector’s second quarter earnings per share growth at an alarming -22%.
JPMorgan is expected to report earnings of $2.94 per share, according to Refinitiv data, down from $3.78 last year. Citigroup is expected to report an EPS of $1.69, below last year’s $2.63, and analysts predict that Wells Fargo will report earnings of $0.85 per share, down from $1.38 in the second quarter of 2021.
But investors have already factored in those drops, said Ghriskey, and barring any surprises there shouldn’t be any major market swings.
JPMorgan stock is down nearly 30% year-to-date. Citigroup has fallen 26% and Wells Fargo has dropped 22%.
“There isn’t a lot of investment banking work going on right now. They’re not making much money on equity trading. Home sales are soft,” he said. “This is very typical for a Fed rate hike cycle and it does argue for the potential of a true recession sometime later this year or next year.”
Hot jobs and a hawkish fed
Recession fears abound as interest rates rise, oil and gas prices surge and mortgage rates plummet. One constant: the state of the labor market remains persistently strong.
All of this sends a clear message to the Federal Reserve, analysts say: Keep on keepin’ on.
“Today’s jobs report does not support the argument that we are in recession presently and shows the labor market is strong enough to weather additional interest rate hikes,” wrote Frank Steemers, senior economist at The Conference Board, in a note on Friday.
Federal Reserve members meet later this month to determine whether further interest rate hikes to combat inflation are warranted. In the latest meeting minutes, members said they would likely raise interest rates by a half percentage point to three-quarters of a point in July.
The market is pricing in expectations of a three-quarter-point hike at more than 95%, according to the CME Fed Watch tool.
“The better-than-expected jobs report appears to clear the way for the Fed to raise rates by another 0.75%, as widely anticipated,” said Jim Baird with Plante Moran Financial Advisors. “With inflation still running hot, an unexpectedly sharp decline in labor conditions may be the only thing that would stand in the way of aggressive tightening as the Fed plays catch up. That may still happen, but it hasn’t yet.”
According to projections taken at the Fed’s latest meeting earlier this month, members of the central bank are predicting that the unemployment rate will end this year at 3.7%, rise to 3.9% next year and hit 4.1% in 2024. But for now, the unemployment rate is holding steady at 3.6%.
Sunday: FOMC member John Williams speaks
Tuesday: PepsiCo reports Q2 earnings
Tuesday: June Consumer Price Index
Tuesday: JPMorgan Chase reports Q2 earnings
Friday: BlackRock, Citigroup and Wells Fargo report Q2 earnings