As the stock market deepens its sell-off, there may be more challenges ahead ahead for corporate America, according to recent profit warnings from Ford Motor Co.
The US economic downturn is predicted to be in the near future, according to investors. The US Federal Reserve raised interest rates by three-quarters of a percentage point for a third straight time on Wednesday in its fight to combat inflation and some analysts think the aggressive hikes could lead to the economy going into a recession.
There has been a rise in earnings as companies face higher inflation and possibly weaker demand.
Last Monday, Ford Motor warned that inflation-related supplier costs would run about $1 billion higher than expected in the current quarter, while FedEx Corp outlined cost cuts of up to $2.7 billion on Thursday after falling demand hammered first-quarter profits.
The announcements are very important, especially if there is a spate of warnings, said Quincy Krosby, chief global strategist at LPL Financial in Charlotte, North Carolina.
She said that the market is worried about demand slowing in the US and demand slowing in the world.
Analysts cut their S&P 500 earnings estimates for the third and fourth quarters, and all of 2022.
Analysts believe that the S&P 500 earnings will have increased only 4.6% over the year-ago period, compared with growth of 11.1% expected at the beginning of July, while earnings for all of 2022 will grow by 7.7% versus 9.5% seen on July 1, according to IBES data from Refinitiv as of Friday.
We didn't see much in the way of earnings downgrades until maybe a month ago. Paul Nolte, portfolio manager at Kingsview Investment Management in Chicago, said that that is changing and it is playing catch-up. It is expected that there will be more fallout. The third quarter results start by mid-October, marking one of the next big events for stock investors.
Over the summer, upbeat corporate earnings had helped support the rebound in US stocks.
The Dow Jones industrial average dropped below its June low to its lowest since November 2020 on Friday, leaving it close to 20% less than its Jan. 4 all-time closing peak of 36,799. 64 points.
The bear market began on January 4, according to a conventional definition. The Dow is the only major index to have bear market status. The S&P 500 is down 23% for the year, while the Nasdaq is down 31%. Both are within easy reach of the bottoms reached in June.
Rick Meckler, partner at Cherry Lane Investments, said the US companies have a tendency to surprise Wall Street with earnings that are stronger than expected.
He said companies have shown an ability to navigate these kinds of situations before. There will be a surprise as to how well earnings can hold up. There are a wide range of issues that companies are facing right now. Russia is planning to invade Ukraine, and there is an increase in inflation and rising rates.
Meckler said that you're getting hit on every side, because you're an investor. Estimates for earnings are being reduced at the same time that the multiple is being reduced, and that's part of what is causing such a big sell-off. The S&P 500's forward 12 month price-to- earnings ratio is now 16.3, down from 22 at the end of December and near its long-term average of about 16, according to Refinitiv data.