Q2 Earnings Likely to Drive S&P 500 This Week

Equity market participants will brace for consumer inflation data and the start of Q2 earnings, both of which are likely to impact stocks in the upcoming week. Consumer giant PepsiCo (NASDAQ: PEP) will report earnings on Tuesday, followed by Delta Air Lines (NYSE: DAL) on Wednesday and banking heavyweights such as JPMorgan (NYSE: JPM) and Morgan Stanley (NYSE: MS) on Thursday.

Several inflation reports will also impact equities and will set the tone on how aggressive the Federal Reserve will have to be to battle inflation.

The consumer price index report will be published on Wednesday and might be higher than the 8.6% reported in May. Economists expect higher energy prices to keep inflation elevated which suggests core inflation (which excludes energy and food prices) will be lower.

Further, the West Texas Intermediate crude futures stood at $122 per barrel in June but have since declined to $105 per barrel. It will be interesting to see how moderation in product prices will be offset by rising services prices including rent.

The producer price index report will be published on Thursday while the University of Michigan will release the consumer sentiment report on Thursday. The retail sales report which also measures consumer behavior will be released on Friday.

The new inflation data follows a strong employment report where the economy added 372,000 jobs in June which was 120,000 higher than estimates. Now strategists anticipate the Fed to increase interest rates by another 75 basis points or 0.75% in July to keep inflation in check, as employment data remains strong.

How will the S&P 500 perform in Q3?

Most analysts and investors are waiting for inflation to peak as it has continued to move higher much longer than initially expected. In an interview with CNBC, Michael Arone, the chief investment strategist at State Street Global Advisors stated, “I do think a risk to the markets is this fact that inflation may not have peaked. I do still believe the markets are at least hopeful, if not expecting, that inflation will decelerate.”

In addition to inflation, the Q2 earnings season will also be a key catalyst for the S&P 500 in July. Corporate profits might easily cause turbulence especially if earnings forecasts continue to move lower for the rest of 2022. In Q2, the S&P 500 is forecast to expand earnings by 5.7% while earnings in Q3 and Q4 are estimated to increase by 10.9% and 10.5% respectively.

Arone explains, “I think the market is bracing for a challenging earnings quarter, so how much it will result in volatility is unclear. I think they will lower their guidance. Why not? It just makes it easier to beat down the road. I do think earnings season will be a disappointment. It will be interesting to see how the market reacts.”

In the last week, the S&P 500 gained 1.9% while the tech-heavy Nasdaq was up 4.5%. The worst performing sectors were energy and utilities while the consumer discretionary sector rose by 4.5%.

Treasury yields stand at 3.07%

The 10-year Treasury note yielded 3.07% on Friday while the 2-year Treasury note surpassed the former for the third time since March. The yield curve is now inverted which signals an upcoming recession. The 2-year yield stood at 3.11% on Friday.

Related: Increased Recession Fears Expected to Drive S&P 500 This Week