LIVE MARKETS Top potential Q4 and 2022 earnings headwinds: Omicron, wage growth, taxes

  • Major U.S. indexes slide; Nasdaq down ~2.5%
  • All major S&P 500 sectors red; cons disc, tech weakest
  • Euro STOXX 600 index falls ~1.6%
  • Dollar up; gold, crude, bitcoin down
  • U.S. 10-Year Treasury yield rises to ~1.80%

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Citigroup (C.N), JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co are due to report results on Friday, thereby firing the un-official starter pistol for fourth-quarter earnings season.

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So what should market participants be listening for during earnings calls this go-around?

In his Weekly Kickstart note, Goldman Sach’s chief equity strategist David Kostin identifies three ongoing areas of concern for investors: “growth threats from Covid variants, margin pressures from input cost inflation, and potential tax reform.”

Regarding the current headwinds posed by Omicron, Kostin fingers the COVID variant as being at least partly responsible for GS economists cutting their 2022 economic growth forecast to 3.5% from 4.2%, adding that each percentage point shaved from GDP “translates into roughly $7 of S&P 500 EPS.”

With respect to rising input costs and the resulting pressure on margins, the note identifies rising wages as the main culprit, as companies faced with a labor shortage struggle to attract workers.

GS economists see wage growth cooling over the next several quarters to “around 4” from the 4.7% annual growth seen in December’s employment report released on Friday.

“Firms with high labor costs or exposure to wage inflation will face the most difficulty in preserving margins,” writes Kostin, who notes that throughout the fourth quarter, companies with “high and stable gross margins … outperformed those with weak and variable margins by 12 pp.”

Finally, Kostin turns his attention toward the possibility of President Joe Biden’s “Build Back Better” bill, which he says “would have mixed implications for U.S. equities.”

Should the legislation be signed into law this year, GS estimates its tax reform “would reduce S&P 500 EPS by 2-3% relative to current tax policy but only go into effect in 2023 at the earliest.”

For now, analysts see S&P 500 companies, on aggregate, year-over-year fourth-quarter earnings growth of 22.4%, according to Refinitiv. That would mark the slowest quarter of 2021, a year that benefited from easy comparison to the pandemic-shock of 2020.

The graphic below, courtesy of Refinitiv, provides historical and estimated S&P 500 annual growth rates (click to enlarge):

Earnings growth

(Stephen Culp)



Major U.S. indexes are sharply lower in early trade on Monday as heavyweight FANG and technology stocks dropped on expectations of a high interest rate environment.

With this, the U.S. Treasury yields climbed to new two-year highs. Indeed, the U.S. 10-Year Treasury yield is pushing back over 1.80%.

That said, the S&P 500 Banks index (.SPXBK) has now turned slightly red, and all major S&P 500 (.SPX) sectors are down on the day.

Meanwhile, the Nasdaq Composite (.IXIC) has violated its rising 200-day moving average, which now resides around 14,688. The IXIC last closed below this long-term moving average on April 21, 2020. With its loss, the IXIC now stands down around 9% from its November-19 record close.

Of note, the IXIC’s daily RSI has now fallen to its most oversold level since May 2021.

Here is where markets stand in early trade:


(Terence Gabriel)



With CME e-mini Nasdaq 100 futures suggesting the Nasdaq 100 index (.NDX) is poised to fall more than 1% in early trade, it appears likely that the Nasdaq Composite (.IXIC) will violate its December lows. read more

In so doing, the tech-laden Composite will be on track for a fifth-straight down day. The IXIC last fell five-straight days in late-September/early-October 2021.

Meanwhile, tech (XLK.P) is quoted down ahead of the open, putting the S&P tech sector (.SPLRCT) also on track to fall for a fifth-day in a row, which would be its longest losing streak since a seven-day slide in late-April/early-May of last year.

On the Composite, once its December lows give way, the next significant support can be the rising 200-day moving average, which ended Friday around 14,680. The Composite has not closed below this longer-term moving average since April 21, 2020:


There is chart congestion in the 14,211/14,175 area that includes a number of significant 2021 highs and lows. The 23.6% Fibonacci retracement of the entire March 2020/November 2021 advance is at 13,951.

Of note, the IXIC’s daily RSI ended Friday at its lowest level since the Composite’s October 4 low. That said, the rising U.S. 10-Year Treasury yield remains a drag on growth/tech shares, and, therefore, a thorn in the Composite’s side. The rolling 10-day correlation between tech and the 10-year yield is now -0.88, or a strong negative relationship. read more

However, the 10-year yield is on track to rise for a seventh-straight day, which would be its longest such streak since an eight-day run of gains in April 2018. So, on the plus side for Nasdaq bulls, at least shorter-term, just as the IXIC may be getting stretched to the downside, yield may be getting stretched to the upside.

(Terence Gabriel)



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Terence Gabriel is a Reuters market analyst. The views expressed are his own

Our Standards: The Thomson Reuters Trust Principles.

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