Earnings season begins in the week ahead with eye-popping growth set to validate market’s 2021 run

Second-quarter earnings reporting season gets underway in the week ahead and eye-popping results could validate a market that continues to easily shake off any concerns on its steady march to record high after record high.

The second quarter’s profits for S&P 500 companies are expected to be up 65% from the same quarter a year ago in the depths of the pandemic, according to Refinitiv. The growth will be led by a near 570% increase in profits for industrials, one of the hardest hit sectors during the pandemic.

“The second quarter could be as good as it gets for economic growth,” said Callie Bost, senior investment strategist at Ally Invest. “Earnings growth may slow, but analysts still expect S&P profits to grow by double digits in the next two quarters. It’s crucial not to lose faith in the market just because the economy’s strongest growth may be behind us.”

The S&P 500 climbed to yet another record on Friday following a minor setback on Thursday. Banks and other stocks linked to an economic comeback led the way. Friday’s gain pushed the benchmark into the green for the week and brought its 2021 gain to above 16%.

The financial sector starts the earnings season off with reports from JPMorgan Chase and Goldman Sachs Tuesday. Bank of America, Citigroup and Wells Fargo report Wednesday, and Morgan Stanley and Truist report Thursday.

The banking industry is expected to produce blowout results for the second quarter with S&P 500 financial sector earnings doubling year over year, according to Refinitiv. Major banks recently announced they will boost their dividend payouts after the Federal Reserve gave lenders a thumbs-up as all 23 passed the central bank’s stress test.

Bank stocks led Thursday’s sell-off on Wall Street as some investors took bets off in the face of a surprising drop in Treasury yields. They then immediately snapped back Friday. Strong earnings result could help stabilize the sector that gyrated amid intensifying worries about slowing growth.

Among other sectors, consumer discretionary companies are also expected to see a big profit comeback, with earnings up 271%, according to Refinitiv. Energy companies are expected to see earnings bounce back by 225%, and materials are expected to see earnings growth of 115%. Tech lags those sectors with just a 31.6% gain. Utilities are expected to see earnings decline by 0.9%.

“Once you pass the peak of economic growth as well as earnings growth, you do get higher levels of volatility,” said Matt Stucky, portfolio manager, equities, at Northwestern Mutual Wealth Management Co. “We still think the path of least resistance is higher when it comes to equities but with more volatility than we’ve had.”

He said he expects stocks to continue to make gains but to grow at a much more normal level. “There’s fundamental reasons to be optimistic about the market in the next year,” said Stucky. He said earnings should be strong and companies that can pass along higher costs will raise prices.

Inflation

There is also some important data ahead, particularly the Consumer Price Index on Tuesday. CPI inflation rose at a higher than expected annual rate of 5% in May, and June could also be hot. The Fed has said it would allow inflation to rise above its targeted 2% level, and watch an average inflation rate.

“I think all of the inflation prints are going to take on added importance,” said Jim Caron, head of global macro strategy at Morgan Stanley Investment Management. “It’s not a question of whether it will fall. It’s whether it will fall fast enough to make the Fed remain patient. If it’s just lingering around a high level, that’s not good.”

All eyes will be on the 10-year Treasury yield’s reaction to the data given the equity market took its cues from the bond market for most of the past week. As the 10-year yield dove to 1.25% on Thursday, the lowest since February, the equity market dropped, believing bond investors were signaling an economic global slowdown could be ahead. As yields snapped back on Friday, so did equity markets.

Other data includes Producer Price Index Wednesday and retail sales for June on Friday.

Tuesday

Earnings: JPMorgan Chase, Goldman Sachs, PepsiCo, Fastenal, First Republic Bank

8:30 a.m. CPI

2:00 p.m. Federal budget

Wednesday

Earnings: Wells Fargo, Citigroup, Bank of America, PNC Financial, Delta Air Lines, BlackRock, Infosys

8:30 a.m. PPI

2:00 p.m. Beige Book

Thursday

Earnings: Morgan Stanley, UnitedHealth, U.S. Bancorp, Truist Financial, Bank of NY Mellon, Cintas, Alcoa, Progressive

8:30 a.m. Initial jobless claims

8:30 a.m. Philadelphia Fed

8:30 a.m. Empire manufacturing index

8:30 a.m. Import prices

9:15 a.m. Industrial production and capacity utilization

Friday

Earnings: LM Ericsson, State Street, Kansas City Southern

8:30 a.m. Retail sales

10:00 a.m. University of Michigan consumer sentiment

10:00 a.m. Business inventories

4:00 p.m. TIC data