The 3rd quarter earnings reporting season for the S&P 500 is fast approaching and it is time to prepare for what could be a very bad season. There are some signs that inflation has peaked, but it's still high, and it's compounded by supply chain problems both old and new. Strong businesses are having a hard time meeting demand because of supply chain constraints, while weaker businesses are faced with a bloated inventory. The outlook for earnings and earnings growth is not expected to improve with the Fed hiking rates by 75 basis points.
MarketBeat.com - MarketBeat There are some underlying details that make the situation worse than it appears, even though the outlook for earnings has been in decline for the last two months. The estimates for Q3 and Q4 have gone down over the past two weeks. The Q3 outlook is 3.6% lower than it was earlier this year. The consensus is on track to hit zero by the start of the reporting season after a full 800 basis point fall in that time.
As the 3rd quarter reporting season wears on, the consensus for the 4th quarter will likely fall more than the 3rd quarter outlook. The Q4 consensus is 4.9% which is down from it's high. Negative earnings growth is not good for the S&P 500 index if the Q4 consensus falls along with the current trends. There is only one ray of light in the outlook data, and that is the fact that consensus for C2023 has gone up over the last two weeks. The increase in expectation for C23 is due to this year's weakness and not next year's strength.
The news is worse on a sector level. Only four of the 11 S&P 500 sectors are expected to show growth. The pace of revision and expectation for growth is down from the previous quarter in the Energy Sector. Three of the most important sectors for the Q4 outlook are seeing huge downward revisions.
The weekly chart of the S&P 500 shows a technical setup that highlights the biggest flaw in technical analysis; the technical indicators are cold. The situation we have today is similar to when a buy signal and a sell signal were used. It's easy to read bullishness in the charts because most investors are bulls and the index is set up in a way that could lead to an upside move. In the context of the economic conditions and the dominant technical signals, the index appears to set up a big fall that could easily take it down to a new low. A long-term Head&Shoulders Reversal pattern has been in play since December of last year. The pattern was confirmed with a drop below the 4,100 to 4,300 level, but it was also confirmed twice with follow-on declines from that same level.
The S&P 500 is in a relief rally and the chart looks like it could be set up for a move higher but resistance is much stronger than support. The baseline of the H&S Pattern, a resistance point that was confirmed once, twice, three times and is now correlated with the 30 and 150 day EMAs, can be counted at the 4,100 - 4,300 range. There are few chances of price action moving above 4,300 without a change in the fundamental outlook. The best-case scenario is that earnings for the broad S&P 500 will be better than expected and there will be a positive outlook for margins. It is too early to bet on that outcome, but it is likely that the index will move higher. There will be a better signal if the index moves higher.
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