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Dow Braces for Excruciating ‘Earnings Recession” as Citibank Readies Report

Last Updated September 23, 2020 12:50 PM
Ben Brown
Last Updated September 23, 2020 12:50 PM

Dow Jones futures traded flat on Monday as investors brace for a painful earnings season. Analysts are widely predicting an “earnings recession,” a second-straight quarter of negative earnings growth.

Citi is first out of the gates on Monday, kicking off corporate earnings season before the bell. The Wall Street giant is expected to hold up on the back of a strong US economy. The real test, however, will come when tech companies report later in July.

Dow futures trade flat ahead of Citi earnings report

Dow Jones Industrial (DJIA) futures  were relatively unchanged ahead of Monday’s opening bell. At 6.24 am, Dow futures traded at 27,346, just 37 points up.

Dow futures chart July 15th
Dow Futures trades sideways on Monday. | Source: TradingView

S&P 500 futures  were similarly flat on Monday, up 5 points (0.15 percent), while Nasdaq Composite futures  crept 8.75 points higher (0.11 percent).

Corporate earnings recession imminent?

US companies are increasingly sounding the alarm as earnings season approaches. More than three-quarters of companies that have issued guidance this quarter have lowered their estimates. The most in 13 years.

Traders now fear an earnings recession, a technical recession that occurs on back-to-back earnings drops. After the first quarter’s 0.3 percent drop, this quarter will be brutal; a predicted 2.8 percent fall across blue-chip stocks .

“If you’re worried about earnings, you should be taking some chips off the table… We’ve had a real nice rally this year. I wouldn’t be surprised if we had a pullback.” – Mitchell Goldberg, ClientFirst Strategy.

Dow Jones to feel the burn?

The hammer is expected to fall hardest on tech stocks. Specifically, tech hardware stocks. With the Dow comprised of Apple, Microsoft, Intel, and IBM, there could be some pain up ahead.

Hardware tech stocks are braced for an outsized 7 percent earnings drop, compared to the average 2.8 percent broader market drop. Patrick Palfrey, senior analyst at Credit Suisse says the low margins will put pressure on tech companies this quarter.

“The margin pressure for large tech companies is what is driving the drop in earnings.”

The Dow could still go up

Despite the warning signs, the Dow Jones could still push higher yet. Traders widely ignored the poor first quarter earnings and fired US indices to record highs just a couple of months later.

Companies may also be low-balling their estimates to soften the blow when figures are revealed. It wouldn’t take much for companies to outperform their low expectations.

Lastly, the stage is set for a blast of stock repurchases this season. As CCN.com reported, the $3.5 trillion of stock buybacks over the last eight years have given the market a false sense of security. If companies commit to more buyback programs this quarter, it could pump the market past recent highs.

Citi prepares earnings report

Citigroup is the first major company to issue its corporate earnings report this quarter. The bank’s stock is already up 40 percent this year, and we’re expecting solid results. Citi will benefit from the strong wage growth and employment numbers in the US, which usually translates to strong mortgage demand.

Citi should give Dow traders a jolt of adrenaline before the US market opens. But the real test comes as tech companies take the stage. 

Click here for a real-time Dow Jones Industrial Average price chart.