Global Stocks Bet on Earnings for Year-End Rally Resilience

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Some negative news has already been factored in for results season. A contrarian rally might also be sparked by extreme investor pessimism.

Investors are eager for any positive news to distract them from the terrible quarter for equities that brought the value destruction for this year to $24 trillion. They could get that if the business results season is vital.

The MSCI All-Country World Index has recently finished its third consecutive quarter of falls, a first since the 2008 global financial crisis.

Investors were coping with chronically high inflation, a rising currency, and massive interest rate rises throughout the globe that threatened to stifle economic development as the 7% decline occurred. In addition, analysts have lowered earnings projections, and several US and European businesses, notably automaker Ford Motor Co., have issued preliminary results warnings.

Now at levels last seen nearly two years ago, the stock market might benefit from a much-needed resurgence if corporations have a lower bar to cross.

A Rare Fourth-Quarter Loss: Can Stocks Avoid It?
In the previous 20 years, stocks have just three times registered 4Q decreases.

Ron Saba, senior portfolio manager at Horizon Investments LLC, advised investors to consider how much negative news has already been factored into their investment decisions. Given the high pessimism and fair prices, the fourth quarter may present a chance for investors to partially recoup their losses.

Although the past is an unreliable indicator, historical stock performance is encouraging for the quarter. The MSCI has only seen a fourth-quarter fall four times during the previous 20 years, compared to the S&P 500’s average fourth-quarter gain of 4.1%.

That does not imply that businesses will end the season with perfect marks. Still, several obstacles might make 2022 forever remembered as a bad year.

One reason is that it is getting harder to protect profitability in the age of increased expenses. As central banks remain intent on containing inflation, businesses must also contend with a tighter monetary policy from the Federal Reserve, the Bank of England, and other institutions. Additionally, there is the conflict in Ukraine, a severe energy issue in Europe, and detrimental Covid limitations in China.

Money Impact
Nike Inc.’s dismal earnings release on Thursday highlighted the risk posed by a higher currency to US businesses with significant overseas exposure.

On the other hand, importers from Europe and the UK must contend with substantially weaker currencies. The Swedish fashion store Hennes & Mauritz AB and the UK multinational Associated British Foods Plc attributed a worsening earnings forecast to the dollar.

But according to Esty Dwek, chief investment officer at Flowbank SA, “certain disappointments are already predicted and probably even priced to some extent,” given the size of previous analyst downgrades and the market’s response to early news.

The most significant share drop occurred last month in more than 40 years when FedEx Corp. withdrew its full-year outlook. CarMax Inc., a used automobile business, fell 25% following a dismal quarterly report.

According to a Citigroup Inc. index, US earnings downgrades have continuously exceeded upgrades since early June, while worldwide 12-month forward profits have been revised lower each month over the last three months. Bear markets are those in which the S&P 500 and Stoxx 600 have declined by 20% or more from recent highs.

Through the third quarter, forward earnings for international stocks declined.

The critical question is whether this will be sufficient in the upcoming earnings season. According to strategists at Goldman Sachs Group Inc. and BlackRock Inc., estimates are still too high, and “we’re going to see quite large decreases for 2023.”

Others find reasons to think earnings can continue for a while.

According to Seema Shah, chief strategist at Principal Global Investors, “there’s little to suggest that earnings would be hurting at this time just looking at the strength of the US economy.” We’re keeping an eye out for guidance, discussions of margin difficulties, wage expenses, etc., but we wouldn’t anticipate it to manifest itself at least until the first quarter of the following year.

According to Bloomberg Intelligence analysts, the S&P 500’s earnings increased 2.9% during the quarter, mostly due to the energy sector. The absence of “economic excesses,” such as the debt witnessed before the 2008 recession, might protect US demand from a sharp downturn, according to Gina Martin Adams, BI’s chief equities strategist.

Increased Energy
S&P 500 sectors’ anticipated 3Q earnings increase

Additionally, exporters gain from a lower euro while importers in Europe suffer. The large French pharmaceutical company Sanofi anticipates a 10% favorable currency effect for the quarter.

Manish Kabra, head of US equities strategy at Societe Generale SA, asserted that the European economy’s health care sector performs best when the dollar grows. A straightforward transaction that usually works.

Even the steadfast equities bear Michael J. Wilson of Morgan Stanley claimed that US stocks are in the “final stages” of a bear market and may produce a rebound soon. But as usual, he anticipates the selloff will get back up.

The distinctly pessimistic investor sentiment may also be a contrarian sign of a stock market rebound in the near term.

According to analysts at Sanford C. Bernstein, their proprietary mood indicator has generated a buy signal, indicating that a bear market rally is extremely likely.

Last month, both US and European markets entered oversold territory.

Technical indicators point to markets preparing for a comeback until the end of the year. The S&P 500 and the Stoxx 600 relative strength indices are at “oversold” levels. In the past, that has indicated a short-term bottom.

Sylvia Jablonski, a chief investment officer of Defiance ETFs, stated: “We have historically bad sentiment, equities are appearing noticeably cheap, the VIX is soaring, and the market is being sold indiscriminately.” She said all three elements “may contribute to a year-end surge” when coupled with seasonal tailwinds.

https://www.bloomberg.com/news/articles/2022-09-26/throw-in-towel-moment-is-yet-to-come-even-after-a-hefty-selloff?sref=gFEoVT3v

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