The second-quarter earnings season has so far disappointed investors with big tech companies, leading automakers, and even top-tier banks projecting a slowdown in earnings growth in the remainder of this year. On average, U.S. companies have slashed their Q3 growth forecasts to 7.3% from 8.6% at the beginning of July. Although the Q2 earnings of reported S&P 500 companies are up almost 10% YoY, the majority of large companies have failed to beat analyst estimates for earnings, failing to impress investors. Some of the notable underperformers in this earnings season include Ford Motor Company (NYSE: F), Tesla, Inc. (NASDAQ: TSLA), and Microsoft Corporation (NASDAQ: MSFT).

A Tumultuous Time

The lackluster revenue and earnings growth projections are coming on the back of persistent inflationary pressures, elevated interest rates, and the continued slowdown in major economies such as China. According to Zacks portfolio manager Brian Mulberry, the unfavorable interest rate environment has played a key role in this outcome. McDonald’s Corporation (NYSE: MCD) reported its first decline in sales after 13 quarters in Q2, which highlights how consumer-focused businesses are impacted by the ongoing slowdown in spending. Interest rates have affected not only consumer spending but also corporate investments, forcing company executives to be cautious of what the next few quarters hold in store. In addition to these reasons, currency fluctuations have also played a role in dampening consumer sentiment.

Zooming Out

According to many Wall Street analysts, the stock market rally may take a break in the coming months with corporate earnings growth expected to slowdown further. BNK Investment & Securities analyst Lee Min-hee believes that investor expectations are already high to the extent that it is becoming increasingly difficult for companies to meet them. Analysts also believe China’s slowdown will continue to impact earnings growth. For instance, DWS portfolio manager Stefan-Guenter Bauknecht believes consumer spending in China will remain lackluster in the foreseeable future due to fears of an uncertain future. Some analysts are optimistic about the future too. Cherry Lane Investments partner Rick Meckler believes consensus estimates for earnings are unlikely to trend lower in the next few months amid rising hopes for the Fed to cut rates in September. Nonetheless, it makes sense for investors to be prepared for a notable rise in market volatility in Q4.

Both Dilantha DeSilva and Stocks.News have positions in Ford and Microsoft. Stocks.News also has positions in Tesla and McDonald's.