"Entering a Downturn in Corporate Earnings? US Earnings Season Kicks Off... Focus on SVB Impact"

With major U.S. banks such as JP Morgan Chase and Wells Fargo leading the way, corporate earnings announcements are ramping up this week, heightening tension on Wall Street. This marks the first earnings season since the collapse of Silicon Valley Bank (SVB). Amid ongoing recession concerns, the net profits of S&P 500-listed companies are expected to decline for the 'second consecutive quarter.'

[Image source=Reuters Yonhap News]

The Wall Street Journal (WSJ) cited FactSet on the 9th (local time), reporting that the net profits of S&P 500 companies in the first quarter of this year are expected to decrease by 6.8% compared to the same period last year. If this occurs, it will mark two consecutive quarters of negative growth following the fourth quarter of last year. This will be the first time since the early stages of the COVID-19 pandemic that listed companies have experienced two consecutive quarters of profit decline. The negative rate is also estimated to be the largest since the -32% recorded in the second quarter of 2020.

Eric Gordon, Head of Equity Markets at Brown Advisory, stated, "From the perspective of corporate earnings, we have already entered a recession." This comment alludes to the common economic definition of a recession as two consecutive quarters of negative GDP growth.

The current environment surrounding companies is equally challenging. Despite more than a year of aggressive interest rate hikes by the Federal Reserve (Fed), inflation has not fallen as quickly as expected, raising concerns about prolonged high interest rates. Additionally, recent concerns about the financial system's soundness have emerged following the SVB incident. The so-called 'Bankdemic' (bank + pandemic) fear has largely subsided due to swift government intervention, but caution remains that this event could lead to tighter banking regulations and credit tightening.

In particular, if the accumulated burden of tight monetary policy is compounded by loan contraction and credit tightening, it will inevitably place further strain on the economy. Leverage issues such as household loans and real estate, which expanded during the low-interest-rate environment, are also considered potential triggers that could explode at any time. Scott Duba, Chief Investment Officer at Prime Capital Investment Advisors, said, "We are trying to understand how much impact the upcoming tightening of loan regulations will have on economic growth." Adam Chrisapelli, founder of Vital Knowledge, noted, "The sentiment around the banking sector is extremely cautious following the SVB collapse," and predicted that "earnings per share (EPS) forecasts will sharply decline."

The first-quarter earnings season officially begins with Delta Air Lines on the 13th, followed by major banks such as JP Morgan Chase, Citi, and Wells Fargo on the 14th. As this is the first quarterly earnings announcement since the SVB incident, investors are closely watching how the bankruptcy of small and mid-sized banks has affected the entire banking sector, as well as what messages management will deliver regarding future loan regulations and credit tightening. This will influence not only growth prospects across industries but also the Fed's future interest rate hike trajectory.

This week, along with the March FOMC minutes, inflation indicators closely monitored by the Fed, such as the Consumer Price Index (CPI) and Producer Price Index (PPI), will be released. The March CPI is expected to rise 5.1% year-over-year, down from the previous month's 6% range to the 5% range. If the CPI unexpectedly remains in the 6% range, concerns about Fed tightening will inevitably intensify. Rand Frederick, Managing Director at Charles Schwab, said, "This week's CPI and PPI will be the most important indicators for the Fed's interest rate decisions." Fed officials including Austin Goolsby, President of the Federal Reserve Bank of Chicago; Patrick Harker, President of the Philadelphia Fed; Neel Kashkari, President of the Minneapolis Fed; Thomas Barkin, President of the Richmond Fed; and Mary Daly, President of the San Francisco Fed, are also scheduled to deliver speeches throughout the week.

According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market currently reflects over a 71% probability that the Fed will implement a 0.25 percentage point rate hike, or a 'baby step,' at the May Federal Open Market Committee (FOMC) meeting. The probability of a rate hold has dropped from the 51% range a week ago to the 28% range.

This content was produced with the assistance of AI translation services.