Seeing the bottom line of earnings deflation

Amid the stock market’s obsession over inflation and interest rates, investors may be asking themselves, “What about profits?” After all, the market is supposed to reflect corporate profit expectations, not just economic statistics.

Of course, those expectations are tied to inflation and interest rates. And that’s why the major stock market measures have been providing stomach-churning moves.

Investors shouldn’t expect much for the third quarter earnings season kicking off in the week ahead. Expectations have fallen quite a bit in recent weeks — so much so that the aggregate reported earnings should be better than forecast. That’s not to say profits are strong.

Third quarter corporate results are predicted to show the slowest earning growth of the COVID-19 pandemic business environment. The profit picture is helped considerably by earnings in the energy sector. Stock market favorites like Meta, Alphabet and Amazon have had their earnings estimates cut by analysts, contributing to the sour mood of the stock market.

FedEx rattled an already nervous market in September when the shipping company came up short of its profit prediction just three months after trumpeting a longer-term bullish outlook. That’s how fast fortunes change in an economy quickly suspicious of fast-rising borrowing costs.

There was similarly bitter news from Nike and semiconductor firm Micron during the preamble of earnings season. Nike tripped on the global supply chain getting straightened out. Inventories jumped 44 percent. That will be good news for Nike shoppers, who will see discounted merchandise heading into the holidays. But it will be bad news for profit margins. During its conference call two weeks ago, Micron tried to sound a note of optimism despite describing 2023 as a year of high economic uncertainty and low visibility. Micron makes memory and data storage chips for computers, smartphones, and cars.

Heading into this earnings calendar, corporate bottom line growth is forecast to accelerate slightly during this quarter and into the first quarter of next year, according to FactSet. That optimism is likely to be tested as companies begin turning in their latest financial results and expectations for a few quarters to come. Investors want to know how firms are wrestling with inflation, rising interest rates, and building economic anxieties.