Investors reeling from Wednesday’s CPI data may be dealt another blow if corporate financials show meaningful profit slowdowns, with higher costs, rising interest rates, and a potential slowdown in consumer spending all themes to watch.
S&P 500 companies are expected to grow earnings at an estimated annual pace of 4.0% in the second quarter, the slowest rate of growth since year-end 2020 if realized, according to research from FactSet.
The estimated net profit margin for the quarter is 12.4%, a figure that would mark the second straight quarter in which the net profit margin for the index has declined year-over-year. Despite persistent headwinds, however, analysts project net profit margins for the S&P 500 will be higher for the rest of the year.
“Investors will be looking for clarity during this earnings season on how companies are navigating rising costs and wages,” Treasury Partners chief investment officer Richard Saperstein said in a note, adding current earnings per share estimates are “overoptimistic given the deteriorating macroeconomic backdrop.”
U.S. stocks rallied Friday but failed to recover from a turbulent week wrought by June's shock inflation report. All three major benchmarks finished lower for the week.
On the earnings front this coming week, big tech results will begin rolling in, starting with Netflix results coming after the market close on Tuesday.
The streaming giant expects to report a loss of 2 million subscribers in the second quarter, a key metric for investors.
Shares have nosedived 70% year-to-date amid a broader rout in growth stocks.
Tesla earnings will also be in focus after the close on Wednesday.
Despite a COVID-related shutdown of its factory in China during the quarter, shipments from its Shanghai plant rebounded last month to hit a record. However, last month, CEO Elon Musk warned of a "super bad feeling" about the economy and said the company is set to trim about 10% of jobs and "pause all hiring worldwide" as fears of a recession grow.
Tesla’s results also come as Musk prepares to battle Twitter in court after pulling out of a deal to purchase the social media platform. Twitter is scheduled to report quarterly results before the bell on Friday.
Other notable names set to unveil their results include Bank of America (BAC) and Goldman Sachs (GS) wrapping up bank earnings on Monday, Johnson & Johnson (JNJ), United Airlines (UAL), AT&T (T), and Snap (SNAP).
Economic worries continue
Last week, inflation data showed consumer prices accelerated 9.1% year-over-year in June, the fastest annual pace since November 1981.
On Wall Street, the figure spurred a wave of speculation that Federal Reserve officials may raise interest rates 100 basis points when they meet later this month. The move would mark the largest interest rate increase in three decades.
Analysts at Barclays led by Ajay Rajadhyaksha considered talks of a full percentage hike an “overreaction” in note to clients Wednesday.
“We also believe that if the Fed genuinely wants to hike 100bp in July, they would need to signal it to markets before the black-out period starts on July 16,” Barclays said. “Yes, they broke forward guidance at the June meeting by going 75bp despite ruling that out earlier, but the CPI report that month came well into the blackout period, and they felt like they needed to seize control of the inflation narrative.”
If the Federal Reserve places too much emphasis on June's CPI reading, the Federal Reserve "risks creating a sense of panic," Andy Sparks, head of portfolio management research at MSCI said in a note.
"It also runs the risk of overshooting and pushing an economy that had been showing signs of weakness into a full scale recession."
Economists at Bank of America said last week they now expect a "mild recession" this year. The firm's equity strategists also updated their S&P 500 target to imply the index will fall 25% from its record high reached on Jan. 3, noting that the average drop in the stock market seen during recessions is 31%.
The benchmark was down roughly 19.5% as of Friday's close.
On Thursday, Federal Reserve Board of Governors member Christopher Waller said he would be open to backing an increase of one full percentage point if upcoming economic releases point to strong consumer spending but maintained his support for a 0.75% rate.
The comments came on the heels of a similar signal made by Atlanta Fed President Raphael Bostic Wednesday, told reporters in St. Petersburg, Florida that “everything is in play” when asked about the possibility of a full percentage point hike.
Data on retail sales and inflation expectations out Friday, however, appeared to temper some investor belief that a 1% rate increase will be coming later this month. According to data from the CME Group, markets are now pricing in a 29% chance of a 100 basis point move this month; on Thursday morning, this figure stood north of 80%.
Monday: NAHB Housing Market Index, July (66 expected, 67 during prior month), Net Long-Term TIC Outflows, May ($87.7 billion during prior month), Total Net TIC Outflows, May (1.3 billion during prior month)
Tuesday: Housing starts, June (1.590 million expected, 1.549 million during prior month), Building permits, June (1.673 million expected, 1.695 million during prior month), Housing starts, month-over-month, June (2.7% expected, -14.4% during prior month), Building permits, month-over-month, April (-1.3% expected, -7.0% during prior month)
Wednesday: MBA Mortgage Applications, week ended July 15 (-1.7% during prior week), Existing Home Sales, June (5.40 million expected, 5.41 million during prior month), Existing Home Sales, month-over-month, June (-0.2% expected, -3.4% during prior month)
Thursday: Philadelphia Fed Business Outlook Index, July (-1.0 expected, -3.3 during prior month), Initial jobless claims, week ended July 16 (240,000 expected, 244,000 during prior week), Continuing claims, week ended July 9 (1.345 million expected, 1.331 during prior week), Leading Index, June (-0.5% expected, -0.4% in during prior month)
Friday: S&P Global U.S. Manufacturing PMI, July preliminary (51.8 expected, 52.7 during prior month), S&P Global U.S. Global Services PMI, July preliminary (52.4 expected, 52.7 during prior month), S&P Global U.S. Composite PMI, July preliminary (52.3 during prior month)
After market close: IBM (IBM)
Before market open: Johnson & Johnson (JNJ), Truist Financial (TFC), Interactive Brokers (IBKR), J.B. Hunt Transport (JBHT), Cal-Maine Foods (CALM), Ally Financial (ALLY), Lockheed Martin (LMT), Hasbro (HAS), Halliburton (HAL)
After market close: Netflix (NFLX)
After market close: Tesla (TSLA), United Airlines (UAL), Knight-Swift Transportation (KNX), Steel Dynamics (STLD), Discover Financial (DFS), Equifax (EFX), Elevance Health (ELV), Alcoa (AA), FNB (FNB)
Before market open: AT&T (T), Travelers (TRV), D.R. Horton (DHI), Blackstone (BX), Union Pacific (UNP), American Airlines (AAL), Dow (DOW), Nokia (NOK), Danaher (DHR), Fifth Third Bancorp (FITB), Tractor Supply (TSCO), Marsh McLennan (MMC), Interpublic (IPG)
After market close: No notable reports scheduled for release.
Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc