Evening Brief – 04.13.23

Earnings season is upon us again and the financial markets must contend with what they will deliver in terms of profits and guidance. FactSet is forecasting first-quarter earnings will decline by 6.8%. According to its pre-announcement season report, as of March 24, 2023, 106 companies in the S&P 500 issued EPS guidance for the first quarter. Among these, 78 companies issued negative guidance while 28 issued positive guidance.

The first quarter of 2023 saw the highest number of S&P 500 companies issuing negative EPS guidance since Q3 2019, with 81 companies issuing negative guidance. If it is 78, it will still mark the fourth highest number of companies in the S&P 500 issuing negative guidance for a quarter since FactSet began tracking this metric in 2006.

Earnings kick off Friday with the money center banks (JPMorgan, Citi and Wells Fargo all on tap), with the highest number of earnings warnings going back 17 years. It stands to reason that the market should be trading lower based on all the recent relatively weak data.

There are many reasons why equities could be lower, including deposit flight, poor liquidity, a credit crunch and a potential recession. Despite these bearish indicators, the equity markets are not breaking, which could suggest that a soft-landing scenario may still be possible.

If inflation is peaking and earnings are troughing, then it could set up a scenario where the recent equity market gains not only hold but potentially gain strong upward momentum. That said, the market knows this and is holding its ground because the tightening cycle is coming to an end, and the Fed is pumping liquidity into the banking system to backstop deposits.

While there may be reasons to “talk” the market lower, the price action tells a different story. It is possible that the market is already in an earnings recession that will end late in the second quarter, with a rebound beginning in the third quarter.