Four reasons why investors may be in for a bumpy earnings season after this weekend

By:
on Apr 15, 2024
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  • Investors beware: this earnings season may not be the smooth sailing you were hoping for.
  • Things are looking very different for the currently underway season after four disruptors last week.
  • We unpack each of them here, and what they may mean for the markets.

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Going into the Q1 2024 earnings season on Friday, markets were upbeat.

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Investors were particularly optimistic about two company types in particular: US oil stocks and AI-related stocks.

All of that changed on Friday and over the weekend, with both of those stock types now facing severe headwinds. Let’s dive into three reasons investors may want to buckle up for the rest of earnings season:

1. A significant disruption for AI stocks is looming

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Technology stocks have been making a mint lately, particularly those related to the AI revolution that has gripped the market since November 2022, with the launch of ChatGPT.

The Nasdaq, S&P 500 and Dow Jones Industrial Average indices are particularly exposed to big tech companies’ earnings, in light of their large market caps, and for the past few quarters this has been a spectacularly good thing, with companies like Nvidia and AMD going from strength to strength.

But these companies, too, got a severe disruption recently in the form of a Wall Street Journal report that alleged that China tasked its largest telecoms providers, such as China Telecom and China Mobile, with phasing out foreign chips and semiconductors, in particular those from the US, earlier this year.

The phase-out will only be required by 2027, but markets are already reacting, with stock prices for both Intel and AMD tumbling as a result.

2. Markets are nervous about the Iran-Israel situation

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Another thing which scared markets towards the end of last week was the news from Iran that it was planning retaliatory strikes on Israel following an attack on Tehran’s embassy on April 1st.

As a general rule, stock markets do not like uncertainty on the world politics stage. Iran’s news echoed eerily with Dimon’s words in the JPMorgan forecast, and sent ripples through the stock market. Crude oil and gold prices soared as a result.

While oil prices were indeed higher, the unpredictable volatility of an escalation in the war efforts of Iran and/or Israel could negatively impact oil companies’ forecasts for the 2024 year, leading to yet more nerves for this earnings season.

3. Bank stocks started off earnings season on a sour note

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Earnings season typically starts with the big banks reporting their financial results first – and this quarter was no different.

The only problem with this is that, of all stocks, we forecast that banks were going to have a particularly bad earnings season (read all about that here).

And, sure enough, banks have thus far disappointed with their results. Both JPMorgan and Wells Fargo gave lower-than-expected net interest income results for the quarter.

As a result, both stocks, as well as Citigroup, fells by the end of Friday, with JPMorgan leading the charge with a 4.2% drop in share price.

While this in itself is not terrible, it isn’t great that the momentum starting off earnings season is so negative, after investors enjoying several quarters of banks riding high interest rates.

The effect of several companies posting somber results all around the same time as each other can “spook the investing public”, Charles Schwab explains, “which can cause them to scale back their stock buying. This reduction in buying demand can weaken the stock market in the interim.”

4 JPMorgan prophesying uncertainty

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Investors also got a reminder on Friday of just how negatively forecasts can impact the markets.

JPMorgan CEO Jamie Dimon gave a warning in his forecast for the rest of the 2024 financial year – a crucial part of Q1 earnings season:

We remain alert to a number of significant uncertain forces. First, the global landscape is unsettling – terrible wars and violence continue to cause suffering, and geopolitical tensions are growing. Second, there seems to be a large number of persistent inflationary pressures, which may likely continue. And finally, we have never truly experienced the full effect of quantitative tightening on this scale. We do not know how these factors will play out, but we must prepare…”

This led to the S&P 500 index closing 1.46% lower on Friday, and the Nasdaq an even more notable 1.6% on the same day.

“Positive or negative outlooks for future quarters can significantly impact investor confidence and influence market trends,” says Jesica Cutter, financial analyst at VectorVest.

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