As the second quarter earnings season gets underway, investors are eagerly awaiting insights into the health of corporate America and clues about the broader economic outlook. With inflation concerns still lingering and recession fears not fully dispelled, this earnings period takes on added significance.

The financial sector traditionally leads off earnings season, with major banks like JPMorgan Chase, Citigroup, and Wells Fargo reporting their Q2 results. While these financial giants posted mixed results, with some beating expectations and others falling short, their reports and guidance offer valuable perspective on consumer spending, lending activity, and the overall economic environment.

One key theme emerging is the ongoing impact of higher interest rates. Banks have benefited from higher net interest income, but are also grappling with increased deposit costs and the potential for loan losses if economic conditions deteriorate. Their outlooks on credit quality and loan demand will be closely scrutinised for signs of stress or resilience in both consumer and commercial segments.

Beyond the financial sector, market participants will be paying close attention to earnings from a wide range of industries in the coming weeks. Of particular interest will be any commentary on inflationary pressures, supply chain issues, labour costs, and consumer demand trends. After several quarters of margin pressure for many companies, investors are hoping to see signs that inflation headwinds are abating.

The charts below highlights a critical dynamic that markets are focused on - the interplay between inflation and economic growth. The charts show inflation trends and GDP forecasts for both the US and Australia. For the US market in particular, there's a clear desire to see continued disinflation paired with indications of improving economic momentum.

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This earnings season could provide early evidence of whether that optimal scenario is materialising. While recent inflation data has been encouraging, with June's CPI report showing further moderation in price pressures, the growth outlook remains somewhat uncertain. Corporate earnings and guidance could offer valuable real-time insights into whether economic activity is indeed picking up as hoped.

Analysts will be parsing earnings calls for any shifts in tone regarding the economic backdrop. After several quarters of cautious outlooks and cost-cutting initiatives, signs of renewed optimism or plans for growth investments would be well-received. Conversely, continued reticence about the future or further belt-tightening measures could dampen sentiment.

It's important to note that expectations for Q2 earnings are relatively modest, with S&P 500 earnings projected to decline slightly year-over-year. This low bar could set the stage for positive surprises if results come in better than feared. However, forward guidance provided by companies will prove even more influential than the backward-looking quarterly numbers.

As earnings season progresses, we (and all market participants) will be piecing together a mosaic of data points to assess whether the elusive "soft landing" scenario remains viable. The ideal outcome would see inflation continuing to moderate without a severe economic contraction. Early indications from this earnings period could provide crucial evidence as to whether that delicate balance is being achieved.

With equity markets having rallied significantly year-to-date, largely on optimism around AI and hopes for a dovish Fed pivot, this earnings season takes on added importance. Strong results and positive forward outlooks could validate the recent gains, while disappointments could lead to increased volatility. The market’s eyes will be on corporate America in the coming weeks as the market seeks confirmation that both disinflation and growth can coexist. As for us, we will as always leverage the work being done on the ground by the handful of specialist stock pickers we work with. Speaking to companies, their clients and suppliers in the US, Europe, Japan and Emerging Markets could help them and us stay one step ahead of official earnings reports.