Us equities, reeling from rising bond yields, are facing a fresh threat as weakening trends in US consumer spending are expected to trigger a string of profit warnings from listed companies.
According to a survey by Markets Live Pulse, 80 percent of 567 respondents are concerned that some industries may warn about earnings trends when they report new quarterly results, causing people to invest less.
Respondents included portfolio managers, traders, individual investors, economists and researchers.
That means the new earnings season could undercut the S&P 500. The index rose 1.2 per cent on Friday (Oct 6) after a breakthrough in talks between auto unions and carmakers boosted market sentiment.
U.S. stock futures fell in early Asian trading Monday after the Palestinian militant group Hamas launched an attack inside Israel.
Multiple challenges
"It's going to be a tough quarter for the consumer sector to start," Stephanie Niven, portfolio manager at Ninety One in London, told me. And that will be combined with the Fed rate hike cycle starting to kick in."
Businesses across the United States, from used-car dealers to retailers, have begun to see consumer demand slow.
While consumer stocks have outperformed the broader market so far in 2023, Morgan Stanley's Michael Wilson team of strategists sounded the alarm on the sector, expecting consumers to pull back on spending as U.S. consumer discretionary stocks fell for a third straight week.
Investors are equally concerned that higher interest rates will start to weigh heavily on the economy and eat into profits that are just beginning to recover. Data last week showed a surprise surge in nonfarm payrolls in September, adding to expectations that the Federal Reserve will raise interest rates again before the end of the year.
Rising interest rates are clearly at the top of people's minds. Some 54% of MLIV Pulse respondents believe that the biggest negative factors will be the impact of higher bond yields and further tightening of financial conditions. Immediately after Friday's non-farm payrolls report, the 10-year Treasury yield neared 4.9 per cent and the 30-year Treasury yield rose above 5 per cent, both touching their highest levels since 2007.
In addition to the risk of higher borrowing costs and a weak consumer, investors believe earnings expectations for S&P 500 companies over the next 12 months are nearing a peak.
About 60 percent of respondents believe upcoming earnings forecasts will drag the S&P 500 lower. Nearly 37 per cent expect the index to end the year down 5 to 10 per cent from current levels, while 8 per cent think it will fall more.
Despite the headwinds, however, more than 40 percent expect the current quarter to show resilience in the economy.
The first test of market confidence will come when jpmorgan officially kicks off the new earnings season on Friday, October 13, ahead of quarterly results from major banks that can be seen as a barometer of the economy's health.
Aneeka Gupta, director of macroeconomic research at WisdomTree, said, "The market is taking in what the Fed is saying, but at the same time considering their forward-looking implications that since they seem so determined to keep rates higher for longer, something has to break."