Oct 13, 2022 - Economy

A "really big driver" lurks behind Q3 earnings

Illustration of line graph turning into a question mark

Illustration: Eniola Odetunde/Axios

Third-quarter earnings are about to kick into high gear — and amid the "will-we-or-won't-we" recession question, we’ll be looking for signals from corporate America about the economy's health.

Why it matters: The Fed’s trying to engineer a soft landing, and the pending Q3 results will paint a picture of how companies are handling that so far.

  • “Right now, the macro is a really big driver,” says Tim Murray, capital market strategist in T. Rowe Price’s multi-asset division.

Be smart: With recession fears on full boil, companies with big earnings misses may take the opportunity to blame the macro environment (including a soaring U.S. dollar).

  • Some cases may be legit — but others, not so much.
  • How to tell the difference? See how they line up against peers in their industry, says Raheel Siddiqui, senior research analyst at Neuberger Berman.

Context: Consensus S&P 500 earnings expectations are for year-over-year growth of 2%-3%.

  • That's down from the 9.9% expected growth as of June 30 — and is the lowest expected growth since Q3 2020, Brad McMillan, chief investment officer for Commonwealth Financial Network, wrote in a research note.

A few signals to watch include ...

The labor market tightrope: In its fight against inflation, the Fed wants to cool the job market — but not too much. Best case scenario would be execs talking about hiring reductions or freezes rather than actual layoffs, Murray says.

  • For any individual company, hiring pullbacks could be a sign of problems — "but if we're seeing that broadly, it's a good outcome for the economy," he adds.

Capital spending: As of Q2, companies' capital spending was growing by roughly 20% year over year, according to BofA Research calculations. That's likely to decline, in no small part thanks to the higher rates engineered by the Fed, Siddiqui says. The question is by how much?

  • If growth goes to low single digits or worse, it's a sign that recession may be close at hand, he adds. "Capex is one of the last things to slow ... it's the dust after the car has left."

Zoom in: For individual companies and their stock performance, all eyes are on margins and guidance.

  • Investors will be watching for which companies were able to maintain or improve margins.
  • Meanwhile, expect companies with negative guidance (or none at all) to be punished in the markets. Those with positive guidance will need a compelling story to back it up, Murray says.

Worth noting: The strong dollar will be a player this quarter, eroding the value of foreign earnings.

What's next: Bank earnings start tomorrow with JPMorgan Chase, Citigroup and Wells Fargo, among others — and next week over 300 companies are set to report.

Go deeper