An ‘Earnings Recession’ Could Push Stocks Lower in the Week Ahead

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After a strong first quarter, the stock market is still rallying.

The biggest factor affecting the market in the week to come will be corporate earnings reports, says Kelly Bouchillon, senior partner at Sound View Wealth Advisors in Savannah, Georgia.

This round of earnings reports is especially important given the possibility of an “earnings recession” — two consecutive quarters of year-over-year earnings declines. Earnings fell in the fourth quarter of 2022, and another drop in the first quarter of 2023 has the potential to “lead to a meaningful market decline,” Kelly says, though there’s no guarantee that will happen.

Here’s what investing experts will be watching the week of April 17:

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Corporate earnings front and center

Some of the biggest names in the stock market — like Tesla, Johnson & Johnson, Netflix and Bank of America — will release data on their first quarter revenue and profit to shareholders in the week ahead. Any big surprises that deviate from analysts’ forecasts have the potential to move the market, but Kelly says the more important information will be the forward guidance that companies will give about their future performance.

Even if a company reports better performance last quarter than analysts expected, warnings about negative future performance can weigh on stocks. The opposite is also true: Positive forward guidance could boost stock prices despite an earnings miss.

“Guidance probably matters more than actual results,” Jeffrey Buchbinder, chief equity strategist for LPL Financial, previously told Money.

More insight from the Fed Beige Book

The week of April 17 will also bring the release of the Federal Reserve’s Beige Book, which includes anecdotal data on economic conditions from each of the Fed’s regional banks. That data is an important policy tool for Fed officials as they work to determine monetary policy.

The central bank has raised interest rates nine consecutive times in its battle to bring down inflation, and experts will be scrutinizing the new data for any clues into the Fed’s move. Investors have been eagerly anticipating the end of the Fed’s tightening cycle, since high interest rates tend to weigh on the prices of financial assets like stocks and bonds.

“It is fairly clear that the Fed is not likely to tighten many more times,” Kelly tells Money, “maybe only once.” That’s a “sign of relief” for the stock market, he adds. Further confirmation of that trajectory could give investors even more confidence.

More from Money:

Why Stocks Could Fall Again as Companies Start Reporting Earnings

Why April Could Be a Strong Month for the Stock Market

Are Index Funds Actually Bad for Investors?

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