Stocks are set to be pummeled by more volatility as companies head into a season of weak earnings, Charles Schwab says

• Stocks are in for more pain as corporate earnings are likely to weaken, Charles Schwab said.
• It pointed to a low rate beat-rate and low earnings growth estimates in the S&P 500 as cause for concern.

Stocks could get pummeled by more volatility through the rest of this year, as companies head into what is shaping up to be a weak earnings season, Charles Schwab warned.

That's a recipe for more pain in the stock market in the final stretch of 2022, especially since more companies could miss earnings estimates in the following quarter, the firm said, pointing to FedEx slashing its earnings guidance last week as a sign of things to come for the rest of the S&P 500.

"We believe the weakness in expected earnings growth is early in its trip to an ultimate negative (year-over-year decline) destination," analysts said in a note on Monday.

They noted that the rate at which S&P 500 companies beat earnings expectations fell to 5% last quarter, compared to over 20% in the middle of last year.

And that could trend even lower in the third quarter as earnings reports roll in. Excluding the energy sector, which has raked in massive profits amid soaring gas and oil prices, Schwab estimates earnings growth in the S&P 500 will shrink by 2% over the third quarter, down over 11% from what it was in June.

It's bad news for investors, and an omen of more volatility. Returns on stocks that missed earnings estimates plunged nearly 4% in the last quarter, "a more significant degree than anything seen over the past five years," analysts said.

In the near term, markets have their eye on the Federal Open Market Committee meeting this week, where Fed officials are expected to deliver a hike of at least 75 basis points and as much as 100 basis points. The policy decision could lead to yet another slide in stock prices –particularly for growth-heavy stocks, which make up a larger share of thee market today than they did in the last inflationary period.

"If higher interest rates continue to dent those stocks' value, and earnings growth slows, there is less upside for profit margins … largely ahead is a further rerating of earnings estimates and likely continued volatility in stocks," the analysts warned.