Third quarter earnings season has barely begun and already analysts are worried about the final three months of the year.
“Guidance is going to be terrible,” BofA strategists recently said in a note to clients, adding that the lender expects them to deteriorate even further.
Key Takeaways
- Factors including a strong dollar, inflation, and weakening consumer demand will probably fuel a poor earnings season during Q3 2022.
- Many companies across a variety of sectors are expected to announce lower or muted guidance for Q4, putting more pressure on stock prices.
- Companies will not necessarily be impacted evenly, with a strong dollar is likely to negatively effect export-focused companies more than domestic-focused ones.
Bad Reporting Cycle, And Worse Than It Looks?
Companies including Micron Technology Inc., FedEx Corp., Ford Motor Co., and Nike Inc., have either cut forecasts or provided muted guidance for the year’s final quarter, in many cases sending their share prices downhill. The reasons run a gamut: accelerating inflation, a strong dollar, rising interest rates, and a slowing economy. Making matters worse, some companies may seem healthier than they are, their shares have already priced in lower expectations. For example, JPMorgan Chase & Co. (JPM) solidly beat analyst predictions for third quarter earnings, even as its earnings per share (EPS) slumped more than 16% year-over-year (YOY).
Multiple Factors at Play
As the economy cools, lowered demand across industries could pose trouble for companies backlogged with an oversupply of inventory, a problem that Morgan Stanley analysts expect to be particularly acute for consumer retail and IT hardware companies. The dollar’s surge could have a disproportionately negative impact on companies exporting goods even as it benefits those doing business only at home. In the past, a stronger dollar has been tied to fewer sales beats.
The Bottom Line
Analysts expect earnings for Q3 2022 to be generally weak and the outlook for Q4 is likely to be worse. Factors including a strong dollar, a backup of inventory, inflation, the Fed’s recent rate hikes, may lead to lower forecasts and lower stock prices.