US results season preview Q2 2022: banks and energy in focus

Financial markets have already priced in a lot of bad news and profit forecasts have been revised lower for every sector but one. We look at bank stocks and other big names to watch this earnings season.

The earnings impact of a remarkable quarter for corporate America will become clearer from tomorrow when big lenders JPMorgan Chase & Co (NYSE:JPM) and Morgan Stanley (NYSE:MS) post figures.

Both are expected to report lower profits, reflecting their need for greater loan loss provisions and a slowdown in global deal making activity as economic storm clouds gather.

Having experienced a string of rapid interest rate rises to combat inflation at a 40-year high, their guidance on the outlook for the rest of the year and beyond will be potentially significant for stock market sentiment. This is particularly the case with JP Morgan Chase, which is America’s largest bank and a bellwether for the world’s biggest economy.

Its chief executive Jamie Dimon last month warned of an economic “hurricane” while his counterpart at Morgan Stanley recently put the chances of recession at 50%. Their caution has been reflected in Wall Street’s performance, with the Dow Jones Industrial Average losing 14%, the S&P 500 18% and the Nasdaq 26% in the year up to this week.

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Away from economic uncertainty and need for impairment provisions, the underlying performance of the banking sector should be robust as higher rates lift net interest income to a decade high. Citigroup Inc (NYSE:C) and Wells Fargo & Co (NYSE:WFC) are also due to report figures on Friday.

For other sectors, consumer confidence has taken a significant hit since the Ukraine war, with the impact from higher oil, food and other commodity prices contributing to a growing trend of earnings disappointment in the S&P 500.

Casualties have included some of the strongest performers from the pandemic, with Netflix Inc (NASDAQ:NFLX) shares sliding more than 25% in April after it reported its first quarterly decline in subscribers in a decade.

It has also warned it will lose another two million subscribers in the second quarter, causing Wall Street’s forecast for more than 17 million additions in 2022 to be reduced to 5.4 million.

Netflix reports on Tuesday in a week that also includes The Goldman Sachs Group Inc (NYSE:GS), Elon Musk’s Tesla Inc (NASDAQ:TSLA) and Philip Morris International Inc (NYSE:PM).

Analysts at Bank of America expect more misses than beats in the current earnings season.

It said: “All of the macro barometers we track that tend to lead earnings results are pointing to a miss - a falling guidance ratio, ailing corporate sentiment, slowing signs in both consumption and industrial activity plus negative economic surprises.”

Analysts at US financial data group FactSet estimate an earnings growth rate of 4.3% for S&P 500 companies, the lowest rate reported by the index since the final quarter of 2020.

Heading into this earnings season, Deutsche Bank said estimates have been revised lower for every sector but energy, which has experienced upgrades on the back of higher prices.

As a result, the bank now expects earnings to beat in the low single digits percentage region and below the long-run historical average of 5%.

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Nicole DeBlase, who covers the industrials sector for the bank, said earnings guidance was likely to be difficult to pitch as most firms are not yet seeing signs of demand weakness.

She said: “It could take months for clear signs of weakness to materialise in the industrial economy, given extended backlogs (created by supply chain constraints) and recent management commentary that demand/orders remain robust (at least through June).

“And, this creates an environment where companies are more likely to come in line with 2Q consensus expectations and to maintain guidance.

Against this backdrop, she added: “Ignorance (of a recession) is unlikely to be blissful, in this instance.”