Lower earnings expectations a risk for stocks

BY Janne Muta

|April 10, 2023

The US corporate earnings season is beginning with projections of a 6.8% decrease in profits, which could impact the stock market's recent gains if there is a further decline. Tighter lending standards and sustained high inflation could further lower earnings expectations. The possibility of another interest rate hike by the Federal Reserve in May due to the tight labour market could also impact the market.

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The markets are currently pricing in a 66% chance of a rate hike in May, and analysts expect more hikes later this year due to persistently strong inflation. Meanwhile, Japan's new central bank governor, Kazuo Ueda, is unlikely to immediately change the Bank of Japan's policy stance, but his stance on Yield Curve Control and negative interest rates is unknown, making the USD the probable main driver for the market.

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Over the last week, DJ formed a flag formation in the daily chart. The market remains bullish above 33 270. Below the level, the market could drop to 32 770. A decisive break above 33 690 opens the way to 34 000 or so.

US corporate earnings season starts this week. The risk here is that the market might not be able to continue recent gains should there be a decline in profits. The S&P 500 is projected to report a second consecutive drop in quarterly earnings, with a 6.8% decrease in Q1 profits, the steepest decline since Q2 2020. Despite this, tech stocks are trending upward, leaving investors confused.

Tighter lending standards could further lower earnings expectations, potentially impacting companies that can no longer pass on price increases to consumers in the face of sustained high inflation. While corporate earnings may cause temporary fluctuations in stock prices, long-term deterioration in earnings could have more serious consequences. Therefore, we need to monitor earnings closely and see how the markets react to the announcements.

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Gold remains bullish above 1944. Below the level, the market could trade down to 1920. The nearest support level in gold is at 1990 and the nearest key resistance level is at 2032 (last week’s high).

As the US employment data signalled a tight labour market, there is a possibility of another rate hike by the Federal Reserve in May. Due to this, the price of gold dropped as it is considered a hedge against inflation, and higher rates increase the opportunity cost of holding the non-yielding asset.

US wage gains slowed a bit but remained too high for the Fed's 2% inflation target. At the same time, a tight labour market makes it difficult to lower inflation without interest rate hikes. The Fed has been gradually raising interest rates in recent years to keep inflation in check but the hikes might not be over yet. The markets are currently pricing in a 66% chance of the Fed raising interest rates by 25 basis points in May and some analysts expect later on this year there’ll be rate hikes due to persistently strong inflation.

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USDJPY is Bullish above 131.84, below the level, the market is likely to move to 131.50. The recent higher daily lows indicate strength and suggest the market probably moves eventually above the 133.80 resistance. However, at first, it needs to work through a consolidation area (132.30 - 133.80). The US CPI release on Wednesday is a risk event that is highly likely to move USDJPY significantly.

Reuters associates the weakening Yen (-0.41%) against the dollar with Japan's new central bank governor Kazuo Ueda taking over from Haruhiko Kuroda on Sunday. The markets have had time to react to his nomination though and a 0.41% move is well within normal daily fluctuation. Ueda was nominated as the next Bank of Japan governor in February 2023. According to economists, even after his nomination, the characteristics of the BoJ board remain dovish. He is unlikely to be expected to immediately change the BoJ's policy stance based on his previous remarks. However, his stance on Yield Curve Control (YCC) and negative interest rates is not really known. Therefore, it's probable that the main driver for this market will be the USD.

The Next Main Risk Events

  • USD FOMC Member Harker Speaks
  • USD CPI m/m
  • USD CPI y/y
  • USD Core CPI m/m
  • GBP BOE Gov Bailey Speaks
  • CAD BOC Monetary Policy Report
  • CAD BOC Rate Statement
  • CAD Overnight Rate
  • CAD BOC Press Conference
  • USD 10-y Bond Auction
  • USD FOMC Meeting Minutes
  • GBP BOE Gov Bailey Speaks
  • AUD Employment Change
  • AUD Unemployment Rate
  • GBP GDP m/m
  • USD Core PPI m/m
  • USD PPI m/m
  • USD Unemployment Claims
  • CAD BOC Gov Macklem Speaks
  • USD 30-y Bond Auction
  • USD Core Retail Sales m/m
  • USD Retail Sales m/m
  • USD Prelim UoM Consumer Sentiment
  • USD Prelim UoM Inflation Expectations

For more information and details see the TIOmarkets economic calendar.

Trade Safe!

Janne Muta
Chief Market Analyst

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Janne Muta

Janne Muta holds an M.Sc in finance and has over 20 years experience in analysing and trading the financial markets.

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