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By Caroline Valetkevitch
NEW YORK (Reuters) - As U.S. companies open their books on the second quarter in the coming weeks, investors increasingly worried about a recession will be anxious to hear what executives say about how demand is holding up in the face of higher costs.
Concerns over a possible recession have already driven a sharp selloff in stocks that resulted in the S&P 500's steepest percentage drop in the first-half of a year since 1970.
But earnings forecasts for the year have largely held up. That has raised questions among some investors about whether current earnings projections reflect those concerns and can remain strong enough to support the market.
Investors have been trying to to figure out whether an aggressive interest rate hike cycle by the U.S. Federal Reserve to tame inflation could tip the economy into recession.
With recession talk having increased in the market, upcoming corporate results and outlooks "are going to be the key catalyst going forward," said Alan Lancz, president of Alan B. Lancz & Associates in Toledo, Ohio.
Earnings from some of Wall Street's biggest banks will unofficially start off the earnings period when they report next week, with results from JPMorgan Chase due Thursday.
For the second quarter, analysts expect overall S&P 500 earnings to have increased 5.7% over the year-ago period, compared to growth of 6.8% expected at the start of April, while they see earnings for all of 2022 growing by 9.4% versus 8.8% expected on April 1, according to IBES data from Refinitiv as of Friday.
(Graphic: S&P 500 quarterly earnings: https://graphics.reuters.com/USA-STOCKS/WEEKAHEAD/klvykryervg/chart.png)
Those forecasts, however, are somewhat distorted by the energy sector, whose earnings are forecast to have jumped by more than 230% in the second quarter following a rally in oil prices. Without energy companies, second-quarter profits are expected to have declined 3% from a year ago, based on Refinitiv data.
"While companies may be able to deliver a decent second quarter, the outlooks are likely to be overall very conservative," said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York.
Last week, Fed Chair Jerome Powell told a European Central Bank conference that "there is a risk" the U.S. central bank could slow the economy more than needed to control inflation.
Commodity and other costs have been rising, and companies have been grappling with how much of those price increases can be passed on to consumers or absorbed.
Among companies that have already reported, Micron Technology Inc recently projected a fall in current-quarter revenue, sparking concerns about demand in the chip industry.