Stocks brace themselves for earnings season

Q4 reporting season begins this week, and for the first time in over two years a full-blown decline in earnings is expected. Earnings are expected to fall 4.1%, the weakest figure since the third quarter of 2020.

Seven out of the eleven sectors in the index are expected to report an annual decline in earnings, with the consumer discretionary, communications and materials sectors leading the declines.

Recession fears remain strong

Weaker demand and cost pressures across a host of sectors mean that recession fears continue to run high. While economic data has yet to turn particularly negative, there are perhaps signs of weakness in the economy, most notably from the latest ISM non-manufacturing PMI in the US.

This dropped into contraction territory for December for the first time since May 2020, and at 49.6 was the lowest reading for the PMI figure outside of the Covid-19 pandemic period. While one data point is not sufficient to indicate that a recession is unavoidable, it is a warning sign that the US economy faces a rocky period in the road ahead.

S&P 500 continues to struggle to hold gains

While indices in many parts of the world have begun the year in bullish form, the S&P 500 continues to struggle.

The index remains well below its November and December highs around 4100, and while it rallied at the end of last week, it failed to hold gains above the 50-day SMA on 9 January.

For the moment the price is holding the 3800 area as support, but a move below this brings 3700 and then 3600 into play as potential downside targets. Buyers will need a move above the 200-day SMA to open the path to a more bullish view that might see the price test the 4100 highs from last month.