Weekly Buzz: 🥂 Raising a glass (half-empty?) to earnings season

Second-quarter earnings season (more on this term in our Jargon Buster below) has kicked off, and it’s worth your attention. Stocks have been rallying, despite companies’ earnings dropping off. And that tells you one thing: if investors are willing to pay a higher price for lower earnings, they’re expecting a strong recovery for the rest of the year. But perhaps it’s better to see a half-empty glass here.

A low bar for earnings, a high bar for a recovery

Realistically, earnings will struggle to disappoint this quarter: expectations have already been slashed that much. Investor forecasts for the current earnings season anticipate an 8.1% overall fall from last year. That’s mainly because profit margins are expected to shrink, with slowing inflation (see our coverage below) hindering the ability of firms to hike prices.

Looking ahead however, investors believe that earnings will continue to rebound from the lows seen at the end of last year. They’re expecting a strong recovery in the final quarter of this year for non-energy companies, and for that uptick to spread across the board next year. Some analysts however, aren’t as optimistic – Goldman Sachs argues that the already high valuations constrain further upside for equities.

How does this affect me as an investor?

Investors will likely scrutinise company reports this season for guidance on three influential themes. The first is AI, with emphasis on the tech’s adoption – although we think of this as more of a long game. Second, credit conditions, especially for credit-laden companies. And third, how healthy retail spending has been.

But unless earnings significantly beat estimates, we’re unlikely to see the sort of rally that followed the previous earnings season. There’s a smaller upside at current valuations – so be wary of interpreting a decent season as a signal to go all-in. As always, diversification of your portfolio across different regions and industries (shameless plug: our General Investing portfolios) ensures you’ll be staying for the long-term, whatever the season.

📰 In Other News: Inflation inches closer to goal

Last week’s inflation data showed that the manoeuvrings of the Federal Reserve (the Fed) continue to beat back inflation. The US consumer price index rose 3% year-on-year in June, the slowest rate in over two years. It seems inflation is inching closer towards the Fed’s 2% target, a goal that seemed out of reach when inflation was peaking at over 9% last year.

There was one caveat to this good news: core inflation (Jargon Buster here). The metric, which strips out volatile food and energy prices, is proving a little stickier, posting a 4.8% yearly rise. So while the Fed is still likely to hike interest rates – a meeting is scheduled to discuss the topic next week – the latest data spurs hopes that the hiking cycle is nearing its end.

This article was written in collaboration with Finimize.

🎓 Jargon buster: Earnings Season

Four times a year, public companies release their financial reports, revealing their performance over the past quarter. Investors eagerly await these reports to assess a company's past performance and future prospects. This important period – known as earnings season – shapes how the market will feel. Positive surprises can boost stock prices, while disappointing numbers may lead to declines.