Earnings Season Looms as Markets Enter Q2: Insights from Interactive Brokers Chief Strategist Steve Sosnick

As earnings season approaches for 2024, markets are entering a critical period, with expectations running high following a strong first quarter. With the second quarter of the year already underway, investors and analysts alike are eagerly anticipating the latest round of earnings results from companies across various sectors.

In an exclusive interview with Market Domination, Interactive Brokers Chief Strategist Steve Sosnick shared his insights on what could drive stocks during this critical period. Sosnick's concerns about meeting expectations are well-founded, as many companies have struggled to beat raised bars in recent quarters. "My concern going forward is that... are we able to beat the raised bar that we've set for ourselves?" he asked Yahoo Finance.

The Raised Bar: Beating Expectations in Earnings Season

Sosnick's concerns about meeting expectations are not unfounded, as many companies have struggled to live up to their own projections. "Some companies have been able to do it," he noted, citing Nvidia as a prime example of a company that consistently beats and raises its earnings estimates. However, for most companies, meeting raised bars is a significant challenge. "Most companies can't do that," Sosnick emphasized.

This issue of beating expectations is closely tied to the concept of "price momentum" in stocks. When investors become accustomed to a particular level of performance from a company, they often price in their expectations accordingly. This creates a self-reinforcing cycle, where expectations are raised and then met, only to be raised again. However, when this cycle is disrupted, it can lead to significant market volatility.

Oil Prices: A Key Driver for Energy Markets and the Federal Reserve

In addition to earnings season, Sosnick also weighed in on oil prices (CL=F,BZ=F) and their influence on energy markets and inflationary expectations. "One of the first lessons I was taught," he began, "was always be nervous when you see oil stocks lead the rally." This is because rising oil prices are often a sign of increasing inflation, which can have far-reaching consequences for the broader economy.

Sosnick noted that recent developments in oil prices suggest a potential double bottom formation, with energy stocks (XLE) outperforming the S&P 500 over the past few weeks. However, he also emphasized the importance of considering the Federal Reserve's perspective on inflation. "Powell keeps harping on inflationary expectations," Sosnick said, referencing Jerome Powell, Chairman of the Federal Reserve. Inflation expectations among individuals are closely tied to food and energy prices, which are volatile and can have a significant impact on overall price levels.

Seasonality: A Factor to Consider in Q2

Sosnick also touched on seasonality as a key factor to consider in Q2. With the "Sell in May" phenomenon looming large, investors may be tempted to sell off their stocks and lock in gains. However, Sosnick cautioned that this is not necessarily a straightforward decision. Tax season is also around the corner, with many individuals facing significant tax liabilities on their investments.

This combination of factors creates a complex picture for investors as they navigate Q2. With earnings season looming large, oil prices influencing energy markets and inflation expectations, and seasonality playing a role in investor behavior, it's clear that market dynamics will be critical in the coming weeks.

Conclusion

As markets enter Q2, investors would do well to pay close attention to Sosnick's insights on earnings season, oil prices, and seasonality. With the stakes high and expectations running high, meeting raised bars will be a significant challenge for many companies. By considering these key factors, investors can make more informed decisions about their portfolios and navigate the complexities of Q2 with greater confidence.