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What should investors focus on after a rocky quarter? It’s all about earnings: Morning Brief

This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Friday, September 30, 2022

Today's newsletter is by Julie Hyman, anchor and correspondent at Yahoo Finance. Follow Julie on Twitter @juleshyman.

It’s the end of the third quarter, and it’s been a bumpy ride for investors. After a two-month, 17% rally for the S&P 500, the index headed downslope, wiping out its June lows this week. The benchmark’s stats are sobering: It has fallen for three consecutive quarters, for a total drop this year of nearly 24%.

It’s been tough to find equity winners. While consumer discretionary and energy shares rose during the quarter, both plummeted from recent highs. Only one-third of the S&P 500 individual components are set to finish the third quarter in the green.

The quarter taught tough lessons to investors about their ability to predict the future. We talked to market pros about their third-quarter takeaways and came away with nuggets of investing wisdom that are particularly pertinent in this uncertain environment for markets.

In short: Stay nimble. Don’t try to call the bottom. And get ready for a doozy of an earnings season.

“Don’t be a hero,” Keith Lerner, Truist Securities Co-Chief Investment Officer and Chief Market Strategist, told Yahoo Finance Live. “The moves have been violent. What we discussed in June and also in August, is to try to get a bit more tactical. You’re not going to get every call right, and it’s not always going to work out.”

NEW YORK, NEW YORK - SEPTEMBER 23: Traders work on the floor of the New York Stock Exchange (NYSE) on September 23, 2022 in New York City. The Dow Jones Industrial Average has dropped more than 400 points as recession fears grow. (Photo by Spencer Platt/Getty Images)
NEW YORK, NEW YORK - SEPTEMBER 23: Traders work on the floor of the New York Stock Exchange (NYSE) on September 23, 2022 in New York City. The Dow Jones Industrial Average has dropped more than 400 points as recession fears grow. (Photo by Spencer Platt/Getty Images)

Many strategists have scrambled to cut year-end forecasts in light of worsening fundamentals tied to persistent inflation, rising interest rates, and slowing growth. Goldman Sachs recently slashed its year-end target for the S&P 500 to 3,600 from 4,300. While it’s tough to predict what the rest of 2022 will bring, analysts seem to be acknowledging that it’s going to be worse than they initially expected.

However, it’s unclear how much worse it’s going to be. BlackRock said earlier this week that investors should avoid U.S. stocks. For how long? There’s no easy answer to that question, said Russ Koesterich, managing director at the firm and a member of its global allocation team that made the call.

“There is no way to tell you the bottom is at a particular number,” he said. “As we’ve seen over the last week, whether we’re talking about the Italian election, the budget dispute in the United Kingdom, a tax on energy infrastructure, there are a lot of hard-to-quantify factors out there, all of which are being compounded by the fact that liquidity is poor, financial conditions are tightening.”

'The focus will be on earnings'

Now that the Fed has clarified its intentions to keep raising rates, and given that the next policymakers’ meeting isn’t until Nov. 2, these pros have their sights firmly fixed on earnings. Analysts predict the S&P 500’s earnings growth rate for the third quarter will be just 3.2%. If that is in fact the reality, that would be the lowest growth rate since Q3 in 2020, FactSet pointed out. As of last Friday, 64 S&P 500 companies had issued negative earnings guidance for the third quarter, while just 41 issued positive guidance.

“Now I think for us it’s not about inflation and central banks; it’s about earnings,” said Luca Paolini, chief strategist at Pictet Asset Management. “The focus will be on earnings because we’re going from a moderation shock, with higher interest rates, to a growth shock. This is where we feel more worried, and next earnings season is going to be really critical.”

That’s been a steady refrain from strategists we speak to on Yahoo Finance Live: Earnings estimates need to come down further, and that process likely means more volatility next quarter.

Investors might have to look further — much further — into the future for relief, as Lerner said. After a 20% slump in the markets, historically, “on a three-year lookout period, markets actually tend to rebound pretty strongly.” Check back with us in 2025.

What to Watch Today

Economic calendar

  • 8:30 a.m. ET: Personal Income, month-over-month, August (0.3% expected, 0.2% during prior month)

  • 8:30 a.m. ET: Personal Spending, month-over-month, August (0.2% expected, 0.1% during prior month)

  • 8:30 a.m. ET: Real Personal Spending, month-over-month, August (0.1% expected, 0.2% during prior month)

  • 8:30 a.m. ET: PCE Deflator, month-over-month, August (0.1% expected, -0.1% during prior month)

  • 8:30 a.m. ET: PCE Deflator, year-over-year, August (6.0% expected, 6.3% during prior month)

  • 8:30 a.m. ET: PCE Core Deflator, month-over-month, August (0.5% expected, 0.1% during prior month)

  • 8:30 a.m. ET: PCE Core Deflator, year-over-year, August (4.7% expected, 4.6% during prior month)

  • 9:45 a.m. ET: MNI Chicago PMI, September (51.8 expected, 52.2 during prior month)

  • 10:00 a.m. ET: University of Michigan Consumer Sentiment, September final (59.5 expected, 59.5 prior)

Earnings

  • Carnival (CL)

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