Business

S&P 500 Faces Challenges – High Rates and Profit Warnings in 2023

By Ryan Bradman | November 17, 2023

Table of Contents

The S&P 500 is set to face a downturn in earnings results, with a majority of respondents expressing concerns about the impact of high bond yields on the U.S. stock market. This new threat is driven by anticipated profit warnings, largely attributed to declining trends in U.S. consumer spending.

Majority of analysts believe that certain sectors are likely to issue cautionary statements regarding their earning trends when reporting quarterly results. This sentiment is expected to weaken the S&P 500 Index, which experienced a 1.2% gain recently following positive developments in union and automaker negotiations.Investors engaged in CFD investing are particularly mindful of these developments as they influence market dynamics.

S&P 500 Faces Challenges – High Rates and Profit Warnings in 2023

Consumer Spending Trends

Various sectors across the United States, including used-car dealers and retailers, are already witnessing a decline in consumer demand. Financial experts like Morgan Stanley’s Michael Wilson have raised concerns about consumer stocks, which have outperformed the broader market in 2023 but may face challenges as consumers curtail their spending habits. U.S. discretionary stocks have experienced a third consecutive week of decline.

Investors are anxious that rising interest rates could begin to weigh heavily on the economy, potentially eroding profits that have only recently started recovering from the sharpest downturn since the pandemic’s onset. The unexpected surge in nonfarm payrolls last month has heightened expectations of further interest rate hikes by the Federal Reserve before the year’s end.

Indeed, elevated interest rates are a significant concern identifying rising bond yields and the impact of continued financial tightening as the primary negative factors during the earnings season. Yields on 10-year Treasuries reached nearly 4.9% immediately following the jobs report, with the 30-year bond surpassing 5%—both reaching levels not seen since 2007. The survey’s median forecast predicts a 10-year yield of approximately 4.82% by year-end.

Earnings Concerns

In addition to the risk associated with elevated borrowing costs and reduced consumer spending, expectations for S&P 500 company earnings over the next 12 months are currently near record highs. Wall street analysts believe that upcoming results will push the S&P 500 lower anticipating a 5% to 10% decline in the index by year-end.

Although the worst of the decline in S&P 500 earnings per share is expected to be behind us, analysts predict a modest drop of approximately 1% compared to the previous year, following a more significant 5% contraction in the second quarter. This information is based on data compiled by Bloomberg Intelligence.

Yet, despite the challenges, analysts expect this earnings season to showcase the economy’s resilience. The first indication of this sentiment will come when JPMorgan Chase & Co. commences the earnings season on October 13, providing insights into the economy’s health.

Technical Analysis of the S&P 500

The S&P 500 Index recently broke its year-long bullish trend, prompting technical analysts to emphasize the importance of maintaining its position above the 200-day moving average, currently situated around 4,204. This moving average serves as a crucial indicator for assessing the longer-term trend’s direction.

Failure to maintain this level could signal another downward leg for the market, warns Andrew Thrasher, a technical analyst. The index has remained above this level for 137 sessions through Tuesday, marking the longest streak since the post-pandemic surge in June 2020.

Tech Giants’ Influence

Although the S&P 500 has posted a gain of over 10% since the beginning of the year, 54% of its member companies have seen their stock prices decline. This contrast is partly due to the significant impact of tech giants, masking weaknesses in utility and telecom stocks. The cap-weighted S&P 500 has outperformed its equal-weighted counterpart by nearly 13 percentage points in 2023, with the gap being the widest since the dot-com boom in 1998 if the year were to end now.

Conclusion

In conclusion, the S&P 500 faces a challenging period marked by concerns over rising interest rates, potential profit warnings, and a shifting consumer landscape. As the earnings season unfolds, investors will closely monitor results and economic indicators to gauge the market’s resilience and direction in the coming months. The market’s ability to maintain key technical levels and the performance of tech giants will also play a crucial role in shaping its future trajectory.