Earnings Key Driver for the S&P 500 This Week

In the week ended on July 15, equity markets remained volatile due to red-hot inflation data that stood at 9.1% for June, compared to estimates of 8.8%. This triggered the possibility of the Federal Reserve raising interest rates by 100 basis points later this month.

Despite sharp gains on Friday, the S&P 500 index lost 1% in the last week. Higher commodity prices have compelled the Fed to increase interest rates despite the threat of an upcoming recession. However, comments from Fed officials and a 1% gain in retail sales for June, as well as better-than-expected consumer inflation data estimates may have reversed expectations in the futures market.

In an interview with CNBC, Art Hogan, chief market strategist at National Securities, stated, “It really was a great study in mob psychology. We went into the week with a 92% chance it was a 75 basis point hike, and we exited Wednesday with an 82% chance it was going to be 100 basis points.” On Friday, there was just a 20% chance for a 100-basis point hike in July.

The most significant catalyst for the S&P 500 in the next week is the upcoming earnings season. 

Big banks, including Bank of America (NYSE: BAC) and Goldman Sachs (NYSE: GS), will report earnings on Monday. On Tuesday, large-cap heavyweights such as Netflix (NASDAQ: NFLX), Johnson & Johnson (NYSE: JNJ), and Lockheed Martin (NYSE: LMT) will report Q2 results on Tuesday. Other note-able companies reporting quarterly results include AT&T (NYSE: T), Union Pacific (NYSE: UNP), and Travelers (NYSE: TRV).

In addition to earnings, macroeconomic data around housing will be released as well. While housing starts will be released on Tuesday, existing home sales are expected on Wednesday. Further, manufacturing and services PMI data will be released on Friday.

Quincy Krosby, the chief financial strategist at LPL Financial emphasized, “Every data point matters and also what companies are saying. Next week... it’s a much broader picture in terms of earnings and the economy.If there are negative revisions and mounting concerns from the guidance, I think then you are going to see questions as to how the Fed is going to interpret that…The other point is whether or not the market can build off today’s rally.”

 

What should investors expect from the S&P 500 in Q2?

Market experts expect the Q2 earnings season will disappoint investors resulting in downward revisions due to issues such as supply chain disruptions, inflation, and many others. According to Refinitiv data, earnings for S&P 500 companies might rise by 5.6% on average, year-over-year. Around 35 companies part of the S&P 500 have reported earnings as of Friday morning, 80% of which beat consensus earnings estimates.

Historically, 65% of these companies beat earnings estimates. It will be interesting to see if this number falls lower in Q2 of 2022. Consumer giant Pepsi (NASDAQ: PEP) reported its quarterly results and maintained its guidance for 2022, and this development was cheered by investors.

In addition to Q2 results, investors will also be watching to see how rising mortgage rates will impact housing data.