Here’s what to expect from the Q2 reporting cycle

That’s probably not good if you’re wondering what Q1 2022 earnings reports will bring in the calendar second quarter reporting cycle. By all accounts, the market and the economy are heading towards a cliff which means job losses, income declines and economic contraction which can lead to bad negative feedback loops. If you think the COVID bubble has been impressive on the upside, imagine how much worse the contraction can get if it gets bigger.

Among the signs are the Challenger, Gray & Christmas report on layoffs and hiring plans and earnings outlook. As for layoffs and hiring plans, layoffs jumped in the first two months of the year to their highest level since 2009. This was just after the housing bubble burst, a precursor more difficult times.

As for hiring, hiring intentions have fallen. Challenger reports hiring plans topped 28,000 in February and 61,000 on a YTD basis, which is down 87% year-over-year for February, and the YTD total is below average for a single month. Job gains are substantial now, but that’s being driven by the rotation of layoff sectors to retail, fast food and other service jobs, and that hiring could end quickly.

The layoffs were already double the number of hirings expected in February, and companies like Metaplatforms (NASDAQ: META) announced additional cuts, including hiring plans. In Meta’s case, the company is cutting an additional 10,000 jobs and 5,000 vacancies. The conclusion is that labor market contraction is looming and will have a ripple and widening effect on the economy.

Earnings outlook is not good

The outlook for earnings growth in 2023 was good last year, but that is no longer the case today. The impact of inflation and rising interest rates has dampened demand to the point that the rise in prices no longer compensates for the fall. Analysts expect to see S&P 500 (NYSEARCA: SPY) earnings growth this year, but only 1.9%, and there is a risk in assuming that will happen. Consensus numbers for all 4 quarters of the year are down, and the 1st half is already deep in negative territory. The ultimate risk is to wait for a rebound for the 2nd half.

Consensus figures show an improvement in earnings growth from -6.1% in Q1 to 9.6% in Q4, but the risk of a downside revision is very high. Analysts have been reluctant to cut their long-term forecasts since the start of the pandemic, leading to a notable trend: estimates for the next quarter are starting to drop with the start of current quarter reports. This means that fourth quarter growth should be 9.6% now, but is trending down and should drop significantly during third quarter reporting, if not before.

At the sector level, the Consumer Discretionary Sector (NYSEARCA: XLY) is expected to see the strongest EPS growth this quarter, but it’s also #1 in downgrades. Retailers love Target (NYSE: TGT) And Walmart (NYSE:WMT) are signaling a shift in inventory to daily newspapers and staples versus discretionary items, and this is clearly seen in the results of companies like Fossil Group, Inc. (NASDAQ: FOSL).

names like Home Depot (NYSE:HD), Lowe’s (NYSE:LOW) And Amazon (NASDAQ:AMZN) gave cautious indications that could prove optimistic later in the year.

Oil: Another Sign of S&P 500 Index Price Decline Ahead

Oil prices (NYSEARCA: USO) have supported S&P 500 revenue and earnings growth over the past 2 years, but that has come to an end. The energy sector has done all the heavy lifting when it comes to index earnings growth, posting triple-digit gains last year and this year on windfall earnings.

The warning is that WTI just broke below $70 and could head back to $50 or lower. This would wipe out the possibility of windfall profits in the energy sector and lead to a period of deflation and economic stagnation.

A look at the chart will show that these fears are not unfounded. The S&P 500 is showing resistance at the 150-day EMA and well below the critical 4150-4300 zone. There is some support at the new low, but that might not last long given the declining earnings outlook. The risk is no longer that the index will fall to the low of 2022, but that it will collapse.

The FOMC may back off on a rate hike now that the banking sector is cracking, but it won’t cut until inflation is down.

Is there an opportunity for investors?

There is undoubtedly an opportunity for investors, but it takes patience and foresight. The whole market is in a correction that could take it to new lows, but will keep it moving sideways over the next several quarters to several years. In this scenario, strong support should be seen at 3800, 3600 and 3000. Eventually, the market will bottom out because the earnings outlook will bottom out.

When this happens, the market will give an “all clear” signal and long-term investors can start putting the money they have saved into working on new positions.

Here's what to expect from the Q2 reporting cycle

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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