Investors gird for market volatility
The second-quarter earnings season has started on a disappointing note, with blue-chip companies missing Street expectations and turning in numbers much below forecasts. As if that is not enough, some have even lowered guidance for the rest of the financial year citing demand challenges and tightening economic conditions. It means the overall outlook for 2023-24 is jack-knifed between a recovery-driven first half and an uncertainty-filled second. Typically, the third quarter holds enough ammunition given the festive demand, but high inflation may continue to depress consumption and household spending. Adding another twist to the wind is the ongoing Israel-Hamas war that has engulfed policymakers with fears of a long-term disruption in not only energy prices but in the global trade infrastructure as well.
Just until a few weeks ago, analysts expected robust earnings in the second quarter, with some projecting a 40 per cent jump in the aggregate revenues of listed companies. Although many firms are yet to publish results, the jury has ruled out fireworks in the second quarter with companies indicating lukewarm sales. Worryingly, the expectation of stronger third-quarter results is also getting blurry owing to geopolitical tensions. The second-quarter drag appears sector-specific for now. If volume growth lifts auto sector earnings, banking and financial institutions may see robust numbers with higher credit offtake and improving asset quality. It is the anticipated single-digit growth of the consumer goods and IT sectors that is likely to more than offset the positive momentum. If high inflation affected consumer goods firms, followed by erratic monsoons that dampened rural recovery, weak macros, competitive pressures and a broad-based disruption in global demand have mellowed IT revenues.
Earnings are a clear evidence of corporate health and the country’s economic well-being. So their forward guidance indicates future growth momentum, which in turn helps investors take an informed decision. Muted earnings in a given quarter by itself may not be destructive; it is quite likely that companies would recover the lost ground in subsequent quarters. However, the ongoing earnings season comes at a time when the equity markets are getting whiplashed by global cues, particularly led by the rising US bond yields and a higher-for-longer interest rate narrative. This could unsettle individual investors, who are now one of the dominant forces in the Indian stock market. They must exercise caution and overcome market volatility.