A stronger-than-expected U.S. June jobs report on Friday calmed fears that the economy might have already slipped into recession, but simultaneously heightened expectations that the Federal Reserve will keep pressing ahead with aggressive interest rate increases. Expectations for aggressive rate hikes, in turn, fuel fears of a significant economic slowdown. And around and around it goes.
“A big concern for this quarter and the next few quarters is the demand side of the equation, and is that falling? If that starts to fall, and fall aggressively, that will negatively impact the earnings picture,” Arone said, in a phone interview. Stock-market valuations, such as the price-to-earnings ratio, have fallen over the course of 2022, largely tracking the decline in stock prices. The 12-month forward price to earnings ratio has dropped from around 24 in September to just above 15, Arone noted. The question going forward is whether stock prices will see additional downside if expected earnings fall in coming weeks.
“We wouldn’t be surprised if the upcoming U.S. earnings season was a catalyst for earnings downgrades and the next leg down for U.S. equities,” he wrote. The week ahead also features key inflation readings, including the June consumer-price index on Wednesday.
Wouldn’t be surprised to see most guidance “better than expected” 😂
Time to trim the fat
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