Earnings season guidance will give recession clues

Investor focus is set to shift from inflation to earnings season, which starts on Friday, as it will give us more insight about a forthcoming recession, says the CEO of one of the world’s largest independent financial advisory, asset management and fintech organisations.

The assessment from deVere Group’s Nigel Green comes ahead of earnings reports on Friday from major Wall Street banks, including JPMorgan Chase, Citigroup, and Wells Fargo. Among other companies reporting next week are Tesla, IBM, and Johnson & Johnson.

He says: “For weeks, it’s all about the trajectory of inflation and subsequent interest rate hikes for investors. But the focus is now shifting to earnings season.

“The big banks will be keenly watched as not only do they often set the mood music for the rest of the season, but also because they are more intricately linked to the rest of the economy than most other sectors.

“In addition, they’ll be more in focus than ever following the crisis triggered by Silicon Valley Bank last month.”

Should banks report lower earnings or revenue than expected, it could be a sign that they are experiencing issues with lending and other financial activities. 

“If banks are struggling, it could make it more difficult for businesses and consumers to access credit, which could, in turn, further slow down economic growth and lead to a recession,” notes the deVere Group CEO. 

“Plus, a fall in bank earnings could indicate a lack of confidence in the wider economy, which would cause investors to pull back on their investments and further exacerbate the likelihood of a forthcoming recession.”

With established economic indicators – such as the inverted yield curve – currently flashing up signs of a possible recession, investors will not only be analysing the reports about last quarter’s earnings, they will be looking at the accompanying guidance for the months ahead.

“Guidance will be in the forefront of investors’ minds this earnings season. Last time around, there was a lot of negative guidance from corporates, and I think we’ll have much of the same this time, too,” says Nigel Green.

“Corporate guidance in earnings season is critical for the wider economy because it provides insight into the future expectations of companies, which will impact investor sentiment and overall economic activity.”

Earlier this week, the CEO said that bond markets and stock markets are not singing the same tune currently. “Both cannot be right. This gaping disconnect between bonds and stocks suggests that investors should brace themselves for significant volatility this quarter” in global financial markets.

“Should the US, the world’s largest economy, fall into a recession, it would clearly have a global impact. Investors will be doing a deep-dive into corporate guidance statements as earnings season kicks off, as recession fears have been increasing in recent weeks,” he concludes.

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