Wall Street has plenty to digest this week , with a slew of economic data that could offer clues on whether the U.S. is set to tip into a recession. It’s also a big earnings week, with more than 150 S & P 500 names set to report by Friday. “With inflation raging, the Fed aggressively hiking interest rates, economic momentum slowing, and recession risks rising, we think the Q2 corporate earnings reporting season is of heightened importance,” said RBC Wealth Management in a note last week. “Earnings news in the coming days and weeks could shape the market’s near-term path and provide hints about prospects for profit growth over the medium term,” RBC analyst Kelly Bogdanova said. Here’s what Wall Street banks are watching for as markets continue to assess how sharp an economic slowdown could be. Margin pressures Analysts say they will be watching this headwind on companies, with higher costs that may squeeze companies more than anticipated. In the United States and Europe, there’s a widening gap between earnings per share numbers and sales beats to below average levels. That implies many firms are facing growing margin pressures, Barclays said in a July 22 note. “While mentions of supply chain issues have moderated a bit compared to prior quarters, mentions of cost headwinds from raw materials, labour and energy inflation remain elevated,” Barclays analysts wrote. Still, some companies may be able to maintain pricing power, said RBC. “For example, PepsiCo reported that it has successfully passed along price increases to customers,” RBC wrote. “But we think other companies will fail to keep pace with higher input and wage costs. We expect margin pressures to cause some high-profile earnings misses and negative guidance.” Earnings distortions Investors need to look more deeply at individual sector contributions to overall index earnings to “better understand how recession risk may play into the earnings picture,” Citi analysts, led by Scott Chronert, wrote in a July 22 note. Citi said the financials sector, which is a “materially higher” contributor, is set to drive 15% of 2023 index earnings relative to its 11% market cap weight. It therefore holds an important key to the earnings outlook, the bank said. Citi expects financial sector earnings to be fairly resilient into next year — relative to recession concerns — on the back of higher rates. Still, the sector is becoming a drag on the overall S & P 500 index, RBC said in a July 21 note. Excluding…
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