By: Hannah MiaoOriginally Published in the Wall Street Journal

Investors worried about the recent pullback in stocks are counting on the coming earnings season to give them something to get excited about.

For much of 2023, U.S. stocks roared higher despite lackluster corporate profits. But an accelerating selloff in bonds has pushed longer-term yields near their highest levels in more than a decade, denting enthusiasm for stocks. A growing expectation that the Federal Reserve will keep interest rates higher for longer is adding fuel to investors’ anxieties.

The S&P 500 is down 6.1% since the end of July, cutting its year-to-date advance to 12%. The pullback has wiped out most of the blue-chip Dow Jones Industrial Average’s 2023 gains.

Companies in the S&P 500 are projected to post a 0.3% year-over-year drop in third-quarter earnings, according to FactSet estimates. That would be the smallest decline in the past four quarters. Because a majority of companies historically beat expectations, some investors think the third quarter could actually see the first earnings growth in a year.

Market sentiment has been heavily influenced lately by the path of bond yields and the Fed’s policy moves, but investors say the earnings season could refocus attention on the fundamental value of stocks: companies’ underlying profits and growth trajectory.

“Investors are looking to earnings as something that can help pull us out of this nosedive,” said Sam Stovall, chief investment strategist of CFRA.

In the week ahead, investors will review results from some of the country’s biggest banks, including JPMorgan Chase and  Citigroup, as well as  PepsiCo and  Walgreens Boots Alliance. They will also parse the latest consumer- and producer-price readings, which are likely to influence the Fed’s interest-rate plans.

Friday’s monthly jobs report showed the strongest payroll growth since January, the latest sign of strong economic momentum that keeps the door open for the Fed to keep raising interest rates. The yield on the 10-year U.S. Treasury note, a key benchmark for borrowing costs on everything from mortgages to corporate loans, briefly surged near 4.9% following the report.

Elevated bond yields make stocks look less attractive because they represent an essentially risk-free return, raising the bar for riskier assets like equities. High rates also make borrowing more expensive for companies, potentially eating into corporate results.

Investors are also interested in what quarterly earnings results and commentary from company executives reveal about the state of the consumer. Household spending surged over the summer, but savings are down from pandemic highs. The restart of student-loan payments could yank up to $100 billion from Americans’ pockets over the coming year.

Mark Luschini, chief investment strategist at Janney Montgomery Scott, said he will be attuned to what management at the big and regional banks say about their consumer banking customers.

“The bloodline of the economy is the banks,” said Luschini.

Early quarterly reports paint a mixed picture of the consumer.

Nike shares jumped after the sportswear giant beat Wall Street’s earnings expectations last month. Executives said demand continues to be strong and the consumer remains resilient.

Food company  Conagra Brands, the maker of Slim Jim meat sticks and Chef Boyardee canned pasta, reported weaker-than-expected quarterly sales last week, citing an industry-wide slowdown in consumption. Shares dropped to a new 52-week low after the report.

“After three years of unprecedented inflation, along with other macro dynamics, consumers have felt increased financial pressure and used a variety of strategies to stretch their balance sheet,” Conagra CEO Sean Connolly said on the company’s earnings call.

Analysts expect communication-services companies to report the highest year-over-year earnings growth among the S&P 500 sectors at about 31%, with

Meta Platforms being the biggest contributor, according to FactSet. They forecast the energy segment to experience the biggest profit decline, compared with last year when oil prices soared and earnings boomed. Another key concern for investors is the impact of a rallying dollar on overseas revenue. A strong dollar can hurt U.S. companies that sell goods abroad by making those products less affordable. The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, is up about 6% from its February low. More than a quarter of the companies in the S&P 500 derive a majority of their revenue outside the U.S., according to FactSet.

“I’m much less concerned about the impact of interest rates. I’m more concerned about the impact of the strong dollar on multinationals.”

Nancy Tengler, Laffer Tengler Investments

“I’m much less concerned about the impact of interest rates. I’m more concerned about the impact of the strong dollar on multinationals,” said Nancy Tengler, chief executive and chief investment officer of Laffer Tengler Investments.

During the last earnings season, when investors saw stocks as “priced for perfection” after a big run-up, companies weren’t rewarded as much for better-than-expected results. But with stocks off their highs and looking cheaper than before, investors say they are looking for buying opportunities this time around.

Tengler said she is looking to add to her positions in certain technology stocks, such as Microsoft, that have taken a breather from their 2023 highs.

Investors often use the ratio of price to earnings as a gauge for whether stocks appear cheap or expensive. Companies in the S&P 500 are trading around 17.7 times their projected earnings over the next 12 months, compared with the five-year average of 18.6.

Earnings estimates for the remainder of 2023 and next year are relatively rosy. Analysts expect profits among companies in the S&P 500 to rise about 7.8% in the fourth quarter and 12% in 2024, according to FactSet.

“We’ve been trading on hype,” David Waddell, chief executive at Waddell & Associates, said of this year’s rally. “We need some fundamentals, and that’s just around the corner.”

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