As Wall Street is about to begin the new reporting season, a disturbing pattern is emerging among S&P company earnings reports: more companies are issuing negative guidance — the highest since Q4 2019.

That's according to FactSet, which monitors the earnings reports of listed companies closely.

"As of [March 25], 95 S&P 500 companies have issued EPS guidance for the first quarter," said John Butters, vice president and senior earnings analyst at FactSet.

"This number is slightly below the five-year average and 10-year average of 99. Of these 95 companies, 66 have issued negative EPS guidance and 29 have issued positive EPS guidance. The number of companies issuing negative EPS guidance is above the five-year average of 59, but equal to the 10-year average of 66. The number of companies issuing positive EPS guidance is below the five-year average of 40 and below the 10-year average of 33."

When looking across industries, FactSet sees the most negative earnings guidance reports coming from the Industrials (+6) and Information Technology (+5) sectors.

What's behind this trend?

Supply chain bottlenecks are the first thing that comes to mind. Both industrials and IT sectors have cited supply chain woes as the primary concern in recent quarterly earnings reports.

Industrials have been suffering from the rise in material and energy costs. And the pain is beginning to spread to other sectors like the homebuilding industry, which faces higher mortgage rates, and the discount retailers lacking the power to pass higher costs on to consumers.

What does this mean for Wall Street?

Lower earnings guidance isn't good for equity prices. Equity markets are forward-looking mechanisms driven by the future rather than past earnings. Monetary developments and geopolitical events could make matters worse for traders and investors both in the short run and the long run.

"In the short run, the direction of the equity markets will be influenced largely by developments in Ukraine," said Robert R. Johnson, a professor of finance at the Heider College of Business at Creighton University. "Notwithstanding the unspeakable human tragedy precipitated by the Russian invasion, longer term the markets will focus on the Federal Reserve and the future path of higher interest rates."

Wall Street has reacted positively to the Fed's first interest-rate hike, believing that the nation’s central bank would manage to engineer a "soft landing," a slowing down of the economy to bring inflation under control, an ideal environment for equities.

But that belief could change if the Fed has to be far more aggressive in raising interest rates than expected to fight inflation.

"As rates rise, the expectations for equity returns will lower as fixed income securities provide competition for investor funds," added Johnson. "Additionally, there will likely be a continued rotation from growth to value in the equity space."

Luke Tilley, chief economist, and Tony Roth, chief investment officer, at Wilmington Trust, are on the same page.

"Recent weeks have yielded a material shift in the global macro environment and the resultant increase in downside risks," they say. "The war in Ukraine adds further strain to inflationary and supply chain pressures. The Federal Reserve has become more hawkish and faces a considerable challenge in managing a 'soft landing' for the U.S. economy. The flattening of the yield curve is a reminder that recession risks have risen, though a recession in the next nine to 12 months is not our base case."

Only time can tell how things will turn out this time around for the Fed's tightening cycle. Listed companies and investors have to adjust their expectations accordingly.

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