5 critical questions corporate America will answer in the coming weeks 😥

'Moment of truth'? ⏰

Expectations for earnings have improved since the beginning of the year. (Source: FactSet)

One of the most extraordinary market stories of 2022 has been the resilience of earnings expectations.

“Economic data is deteriorating, the first half of the year was one of the worst ever for global markets, and yet consensus estimates now point to a higher earnings growth rate for 2022 than back on January 1st,“ Bank of America analysts wrote in an email on Sunday.

This Thursday, the big banks kick off earnings season with the release of their Q2 financial results. That means in the coming weeks, we’ll hear from the biggest companies in America as they announce their quarterly earnings and discuss their business outlooks.

Morgan Stanley’s Michael Wilson thinks the coming weeks could be “The Moment of Truth, or Denial,“ as he titled a July 5 research note.

“The direction of stocks from here should be mostly about earnings,” he wrote. “Q2 results should shed some light on the outcome.”

And most experts don’t expect a lot of good news regarding Q2 results.

“All of the macro barometers we track that tend to lead earnings results are pointing to a miss — a falling guidance ratio, ailing corporate sentiment, slowing signs in both consumption and industrial activity plus negative economic surprises,” BofA’s Savita Subramanian wrote on Tuesday.

It’s not just Q2 either. Experts think prospects for the coming quarters aren’t much rosier.

“We expect cautious commentary will prompt cuts to forward estimates,” Goldman Sachs’ David Kostin wrote on Friday.

For investors, the question is to what degree any downward revisions to earnings will affect stock prices, which have plunged around 20% since the beginning of the year.

“Equities may struggle to make headway whilst EPS forecasts are falling, even if discount rates continue to recede,” Daniel Grosvenor, director of global equity strategy at Oxford Economics, wrote on Friday. “However, we think the market is already pricing in a worse outcome than the consensus expects, and this should limit further losses.“

In other words, bad news might not necessarily cause stock prices to fall further. In fact, if the news isn’t much worse than what’s priced into the markets, then markets could actually rally.

With all that in mind, below are some tough questions we expect corporate America to answer.