Investors view corporate earnings season as next test for stocks

Despite inflation, rising interest rates and concerns about the health of the banking sector, US stocks are up 6.9 per cent this year. Corporate earnings starting this week will test their resilience — the latest in a long list of challenges.

JPMorgan Chase, Citigroup, and Wells Fargo will report their March quarter numbers this week and investors will also read the latest consumer- and producer-price reports to understand whether inflation is easing — a key metric that can impact the speed at which the Federal Reserve raises interest rates.
 

To be sure, Wall Street has been lowering its earnings estimates, and investors will train their sights on the latest results to understand how much corporate profits can evaporate and whether that makes the shares of these companies look pricey compared to their value.
 

The scrutiny of bank stock, which will kick off the earnings season, will be more this time in the wake of the two biggest bank failures since the 2008 financial crisis.
 

Falling profits mean stocks may appear more expensive relative to the companies’ profit going ahead. Companies in the S&P500 are trading at about 18 times their projected earnings over the next 12 months, according to FactSet. This is higher than the 10-year average of 17.3.
 

A closely watched US inflation report next week could help settle one of Wall Street’s most pressing questions: Whether the market has correctly pegged the near-term trajectory for interest rates. 

Following last month’s banking crisis, investors have become more convinced the Federal Reserve will cut rates in the second half to ward off an economic downturn. Such bets have pushed bond yields lower, supporting the giant tech and growth stocks that hold sway over broad equity indexes. The S&P 500 has gained 6.9 per cent so far in 2023.
 

Recession worries are mounting, with investors betting the tumult in the banking system sparked by the March collapse of Silicon Valley Bank will tighten credit conditions and hurt growth.