Week Ahead: Markets brace for ugly earnings season

Coming up this week – just how bad will the Q2 corporate earnings season be and will central banks in Europe and Canada increase stimulus?

Q2 earnings season

Corporate earnings season gets underway on Wall Street as major companies report their Q2 numbers. 

Expectations are very low with total S&P 500 earnings set to be -44.4% on -10.9% lower revenues.  

Bank of America expects S&P 500 companies exceed consensus EPS estimates by 8% after Wall Street lowered profit expectations by around 40% heading into the Q2 season. Analysts have lowered their Q2 bottom-up EPS estimate by 37% over the quarter meanwhile, suggesting that there is a very easy bar for corporates to clear. 

But the market remains forward-looking and therefore with a lot of bad news baked in already, investors will be keen to see what the outlook is for the rest of the year – does corporate America see a rebound? If they do it could bode well for equity indices. 

This week sees Wall Street’s big banks report earnings, with JPMorgan, Wells Fargo, Morgan Stanley and Goldman Sachs all due to update the market.

EU Summit & ECB meeting

EU leaders will meet physically in Brussels July 17th and 18th to discuss the recovery plan to respond to the COVID-19 crisis and a new long-term EU budget. This may be a pivotal moment in shaping the EU’s economic response to the pandemic and hammer out agreement over the proposed €750bn rescue package. Several member states – led by the ‘Frugal Four’ but by no means restricted to them – have expressed concerns about the fund and the plans for the EC to borrow funds directly to bankroll the fund.  

Government borrowing costs have returned to pre-pandemic levels, indicative of the success the ECB has had in underpinning financial markets. However, failure to get agreement at the European Council meeting this week could see yields rise and spreads widen again, which may put pressure on the euro. If German chancellor Angela Merkel manages to get the agreement sealed, whether by strong arming or sweet talking, the euro has some upside to explore. 

Christine Lagarde meanwhile has indicated the ECB will hit the pause button on its easing programme, saying the European Central Bank has ‘done so much that we have quite a bit of time to assess [the incoming economic data] carefully’. This should put to rest any thoughts the central bank would announce fresh easing measures at this week’s meeting. Ms Lagarde wants to stress that it’s time for the EZ member states to step up and sort out the fiscal support rather than leaning ever more on the ECB and lower rates. 

Bank of Canada

The Bank of Canada is expected to leave interest rates on hold at 0.25% when it meets on Wednesday, so we’ll be looking to get an update on how the central bank views the path of economic recovery.  

Business sentiment in Canada is “strongly negative” a Bank of Canada survey showed last week, though half the companies polled expect sales to return to pre-pandemic levels within 12 months. “Softer sales expectations are widespread across all regions and sectors, with firms often expressing a high degree of uncertainty about consumer behaviour and future demand,” the central bank said. 

New governor Tiff Macklem expects growth to return in the third quarter but expects a ‘bumpy’ ride for the economy. In his first speech as governor last month Mr Macklem stressed that the BoC would not take its benchmark rate negative. 

How quickly is the global economy recovering?

Various data releases will help show how quickly economies are recovering. Britain’s latest GDP report is due up on Tuesday alongside Chinese trade figures. Watch for Australian employment data and Chinese GDP, industrial production and fixed asset investment figures on Thursday. On Friday the UK retail sales numbers for June are expected to show more improvement after rebounding sharply in May. Sales rose 12% in May, after plunging 18.1% in April. As ever we will be watching for the US weekly jobless claims numbers on Thursday, whilst the Philly Fed manufacturing index and University of Michigan consumer sentiment report are both due out later in the week.

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

Top Earnings Reports this Week

Here are some of the biggest earnings reports scheduled for this week:

Key Events this Week

Watch out for the biggest events on the economic calendar this week: