An "unignorable" bearish factor: US stock market earnings warnings approach

According to the latest Markets Live Pulse survey, as profit warnings and concerns about rising interest rates increase, the S&P 500 index will face more pain, threatening this key indicator of the US stock market.

Deutsche Bank strategists said that the earnings season of the past 10 years has generally been favorable for the stock market, but among the 346 respondents in the MLIV Pulse survey, 55% of them believe that the upcoming earnings season will be unfavorable for the stock market.

Optimism about a soft landing for the economy is dissipating as stubborn inflation keeps the Federal Reserve in a hawkish stance. After a strong rally in the stock market in the first half of this year, market sentiment is being dampened by expectations of higher interest rates for a longer period of time, as well as poor earnings reports from companies such as FedEx, ExxonMobil, and Nike.

Hargreaves Lansdown's Chief Equity Analyst, Sophie Lund-Yates, said, "The negative noise of the earnings season will definitely be a factor in slowing down the US market," especially as economic indicators suggest further rate hikes in the future.

42% of respondents believe that the biggest negative impact of the earnings season will be the further tightening of the financial environment. The employment data released last Friday showed that the market still expects a rate hike in July by the Federal Reserve, but wage growth in June was stronger than expected.

48% of survey participants believe that the decline in earnings per share of S&P 500 constituent companies will only stop after the third quarter. Meanwhile, data shows that analysts expect earnings per share of these benchmark constituent companies to rebound and grow in the last three months of this year.

On July 14th, JPMorgan Chase, Citigroup, and Wells Fargo will officially release their earnings reports. Approximately 53% of respondents expect disappointing earnings from these major banks, confirming the deteriorating outlook for the industry and impacting bank stocks. Shengbao Bank's stock strategy director, Peter Garnry, said, "If companies fail to meet expectations in the third and fourth quarters, the US stock market may be particularly vulnerable due to the continuous rise in valuations this year."

Technology stocks will be particularly scrutinized as their valuations have risen significantly after a 39% surge in the Nasdaq 100 index in the first half of this year.

Although the hype surrounding artificial intelligence has driven the rise of technology stocks, over 70% of survey participants believe that the impact of artificial intelligence on the earnings of technology stocks has been exaggerated. If companies such as Nvidia (NVDA.US) and Microsoft, which are leading in the field of artificial intelligence, disappoint investors with their earnings, they are more likely to be affected by a decline in stock prices.

Ulrich Urbahn, head of multi-asset strategy and research at Berenberg, said, "Rising yields will put significant pressure on long-term assets such as technology stocks." "Due to the generally optimistic expectations, we are more skeptical about the earnings in the third and fourth quarters in the United States."

Most respondents believe that the biggest positive factors driving the stock market will be any signs of slowing inflation and cost reduction in a gloomy environment.

However, overall, compared to the unexpectedly strong earnings in the first quarter, the outlook this time appears more bleak. Mislav Matejka, a strategist at J.P. Morgan, said that with cooling inflation and slowing economic growth, companies will lose the ability to continue raising prices, and profit margins will face pressure.

James Athey, investment director at Abrdn in London, said,