Preview: The Most Important Earnings Cycle in Three Years?
Although, we did see this show play out during the pandemic
- Geopolitical tensions are high just as the third-quarter earnings season arrives.
- Labor and wage costs are beating inflation, but the job market and retail sales have been robust.
- The peak of earnings season will occur during the week of Oct. 30.
The S&P 500 is down 2% since July and has endured plenty of storylines that have threatened to derail gains in 2023. Geopolitical tensions are high with two conflicts in progress: one in eastern Europe and one in the Middle East. Additionally, U.S. economic data consistently seems to reinforce the fact that interest rates will be higher for longer. And nobody seems to know the exact nature and duration of longer.
Right on cue, third-quarter earnings are just getting underway and could be the most important we've seen since pandemic times. Remember 2020 when it was difficult to forecast the impact of the coronavirus on corporate earnings? No one could have predicted how nimble and innovative companies would become as a result of a worldwide pandemic. Yet, somehow many companies pulled it off. Adapt or die.
The rising cost of labor and interest
Corporations are arguably in the same position now except this time the proverbial boogeyman is labor costs. Labor is a major cost at most companies, and it has continued to rise. Wage growth has also been beating inflation, which, means many companies’ wage bills are rising more rapidly than the prices they are able to charge.
Making matters worse, the rise in interest rates, which is supposed to combat inflation, has led to rising financing costs that, ultimately, weighs on demand. And if that isn't enough, many overseas economies have been weak, while the strength of the dollar has cut into the value of profits U.S. multinationals earn abroad. It's a vicious cycle.
Sustained consumer spending
On the flip side, a strong job market is giving consumers the ability to keep spending. Americans are increasingly allocating more of their spending toward services and away from goods as the pandemic’s effects continue to lessen. This bodes well for public companies like Apple (AAPL) and Walmart (WMT). They make or sell goods overrepresented in the S&P 500 compared with the overall U.S. economy.
So how does it all end? We should have a pretty good idea where things are headed after the five days ending Nov. 3. Not only is it the busiest week of earnings season, but the Fed will have concluded its sixth meeting of 2023 that week. Lots of fireworks will be popping off and I cannot wait to see it.
Jermal Chandler, tastylive head of options strategy, has been in the market and trading for 20 years. He hosts Engineering the Trade, airing Monday, Tuesday, Thursday and Friday. @jermalchandler
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