I’ve written and spoken about earnings season in the past. Most of my thoughts have come down to the fact that I think overreaction during earnings season is common. We have companies come out and get praised for doing well and others crushed for not doing well. While some reaction is warranted, I tend to find myself thinking that it is typically overdone.
Fast forward to the third quarter earnings season that will start in mid-October after the quarter ended September 31. This one is important, as is the next. Potentially more important than some that we have had in the past couple years.
Here’s the back story as to why: For the last decade, prior to 2020, earnings season were typically status quo. The economy and companies were growing at tremendous rates and were being rewarded for doing so. Of course there were some hiccups along the way, but the overall theme of the decade was that things were going well. As we know, we then had 2020, a bit rocky, and then 2021, a great year for growth.
Now we come to 2022. A year that has been a little bit more choppy than years past in the economy and market. The first half of the year was labeled by some really big macro themes. Most notably, the Russia and Ukraine war, inflation, and supply chain disruption. Throughout these disruptions, the prior two earnings seasons for Q1 and Q2 have been a mixed bag of reports. Some companies have continued to do well while others have proven to hit some difficult times. As things have gone throughout the year, we have seen the consumer remain strong and this has helped boost the earnings of companies over that time as well, even with all of the other uncertainty surrounding the economy and markets.
So where does this leave us going into Q3 earnings? In short, it leads us to more uncertainty and a forecasted growth slow down. That is why this quarter is important. It lets us see how consumers have continued to respond this year to the continuing inflation and economic strain. A wavering consumer shown through these results will show the signs of a consumer that is less willing and able to spend; slowing business and economic growth.
However, we also may see that consumers have remained incredibly resilient and companies may have grown because of that. If consumers have continued to spend and prop up the economy like in years past, we may see the market react positively to that news.
Now, if it does end up to show a weaker consumer is this all bad? No. We are forecasted to have some slowdown to growth. Arguably, it is beneficial to have the consumer reset and take a look at their own spending and behavioral habits. Just not ideally in the conditions we will see it under.
Long-term, all will be fine if weakness shows. The consumer will find strength again. Because of this, companies and the economy will grow again.
This quarter is just a deeper look under the hood in what the short-term may bring us to round out the end of 2022.