Themes to watch out for in the coming earnings season

Today is the unofficial start of the fourth quarter earnings season. Over the next month and a half, virtually all the listed companies in the world will issue their latest earnings reports. Not surprisingly, the markets tend to get quite a bit more volatile during this period. And not just the stock market, because the trends that major companies see can have important implications for the currency markets.

Already analysts have calculated what to expect for a lot of the firms, and particularly the large capitalization ones that could move the currency market as well. There are already some expectations of how this earning season could affect the markets, and some things that could cause a sudden turn in the markets.

Inflation vs growth

One of the main themes of the last earnings season and could be repeated now is what could be called "ghost profits". That is when a company reports an increase in sales, but lower volumes. Which in turn translates to an increase in nominal profitability, but the company actually makes less. 

That's because when companies raise prices, their revenue goes up. But if it's part of inflation, then the actual sales volume might go down. Meaning that, without inflation, their sales actually dropped. That's a bad sign for a company, even if it looks good on paper. And if profits don't increase faster than inflation, then the actual value of the company has gone down. Thus, many companies could report higher earnings, but the stock underperforms, and the markets shift towards safe havens. 

The rise of zombie companies

According to a recent study, the number of zombie companies has hit a record high. A zombie company is when the interest the company has to pay on its debt exceeds its profits. Which means it can't pay down its debt, and it might even have to take on more debt just to make payments on what it already owes. 

Naturally, as the cost of borrowing increased in the last year, the amount of interest companies had to pay on debt increased as well. This substantially eroded their profitability, and potentially put them on the road to bankruptcy. As these companies become increasingly more risky investments, they have to pay higher interest rates to attract investors, creating a vicious cycle. That also increases the risk of the market, motivating people to turn to safe havens, like gold, the yen and the swissie.

Shifting consumer demand

Major banks and retail outlets have a direct line to what consumers are buying, and how they are behaving. As inflation takes hold, people are expected to spend less. That will likely be expressed in credit card numbers reported by major banks. If the economy is slowing down, then major retailers will see slowing sales volumes (not to be confused with sales, as mentioned above, because of inflation).

Logistics companies like FedEx could have an outsized impact on the market, as investors are looking to gauge supply chain problems as well as the resilience of demand. If UPS, Royal Mail, etc see solid organic growth and increased parcel volume, it could reassure investors that the economy might avoid a recession. But if logistics firms see sales dropping in the near term, it might be another indicator that a recession is coming.