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In arguably the most important week for Wall Street this summer, with the Fed decision and GDP on tap, earnings could actually end up determining direction.

There are 175 S&P 500 (SP500) (NYSEARCA:SPY) companies set to report Q2 results, including 12 Dow (DJI) (DIA) components. Big names on this week’s the calendar include McDonald’s (MCD), ExxonMobil (XOM), Ford (F) and the rest of the megacaps: Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Meta (META) and Alphabet (GOOG) (GOOGL).

To date, results have been below par. Of the 21% of S&P companies reporting, 68% have topped expectations. That’s below the five-year average of 77%, according to FactSet. The average beat of 3.6% is shy of the 8.8% average. The earnings gorwth rate of 4.8% is improving, but would be the lowest since Q4 2020. The 65% of companies beating on the top line is below the average of 69%.

Still, the S&P is up 7% since the reporting period started and Citi says results are showing “resilience” that will push the broader market higher in the second half of the year.

Where to look: It is important to dig into earnings on a sector level and take into account the concentration of profits in the big names.

So far, positive surprises “have been the norm in most sectors,” Citi strategist Scott Chronert wrote in a note.

Investors “need to look more deeply at sector contributions to index earnings to better understand how recession risk may play into the earnings picture,” Chronert said “In addition, it is critical to recognize concentration in the largest earnings contributors when assessing index earnings.”

“The top 20 stocks by earnings contribution are expected to determine 35% of Q2 index earnings, while the top 50 comprise 53% of index earnings. The early takeaway is that earnings surprises are running stronger for the top 100 earnings contributors than the ‘bottom 400’. Interestingly, per this data, the earnings concentration among the top 100 stocks is over twice that of the next 400.”

Outlook: Citi says earnings expectations for 2023 look optimistic, but “there may be more earnings resilience in a mild recession scenario than commonly expected” and while “earnings cuts are widely expected, they need to be weighed relative to the valuation compression which has already occurred.”

“In looking at the past week’s action in response to early earnings reports, we point out that expectations have likely soured to the point where ‘less bad than feared’ results can trigger a positive market response,” Chronert said.

MKM strategist Michael Darda says equities can avoid a second leg down this year, even if there is an impending earnings collapse.

“In other words, we could have two bear markets (the first half of 2022 and again sometime in 2023 if there’s a recession next year) with a large unanticipated bull market in between,” Darda said. “There is also the possibility that the bear market already happened and even if there is a relatively mild recession this year or next year, equity markets will be supported by lower discount rates and the anticipation of an (eventual) recovery.”

See the SA earnings calendar.

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