Fed’s next interest rate move may crystallise with this week’s economic data

“I also really have the debt limit on my radar,” he added.

It’s still early in US earnings season, but the results so far are coming in strong enough that some on Wall Street are starting to wonder if they were too pessimistic about corporate America’s performance.

‘It begs the question: were expectations intentionally set too low, and are they still too low?’

Mike Loewengart, Morgan Stanley

Roughly 20 per cent of the S&P 500 Index has posted quarterly earnings and more than 77 per cent of the reports were better than expected, according to data from Bloomberg Intelligence. Solid results from the country’s megabanks, and better-than-feared outcomes from smaller lenders are driving the strong start to the first-quarter earnings season.

“We’ve seen a large number of the names that have reported so far beat expectations, so that’s encouraging,” said Mike Loewengart, head of model portfolio construction for Morgan Stanley’s global investment office. “It begs the question: were expectations intentionally set too low, and are they still too low?”

The overall strength in results so far had Bank of America strategists led by Savita Subramanian pondering whether their 2023 earnings per share target of $US200 ($298) for the S&P 500 was too grim, according to a note to clients this week. The consensus earnings forecast for S&P companies over the next 12 months is $US219 a share, data compiled by Bloomberg show.

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Part of the reason for strategists mispricing earnings could be that the highly anticipated earnings recession actually has been happening under the surface for nearly a year — and may be nearing an end.

An earnings recession is typically defined as two consecutive quarters of corporate profits below their year-earlier level. And excluding energy, which skewed estimates for the broader index last year due to higher commodity prices and elevated inflation, S&P 500 earnings have been declining year-over-year since the second quarter of 2022, according to Bloomberg Intelligence.

“Investors are forward-looking, and a lot of this ‘earnings recession’ story has already been priced in, so forward guidance is far more important,” said Ken Xuan, Fundstrat Global Advisors’ head of data science research, pointing to the 15 per cent climb in the S&P 500 since October’s low.

Most importantly for the market and world at large, the worst of the stresses plaguing the banking industry appear to have passed. Major money centre lenders reported healthy results last quarter, with JPMorgan Chase & Co, Citigroup, Wells Fargo & Co and Bank of America Corp thriving in a rising rate environment.

Other embattled regional banks report this week, including First Republic Bank on Monday and PacWest Bancorp on Tuesday.

Bloomberg

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