Earnings Season - Small Rally As Earnings Season Starts
The stock market rallied slightly on Monday as this week starts earnings season unofficially. Technically, 24 firms have already reported results. But the main swath of earnings season is the in next 3 weeks.
On Monday, S&P 500 was up 2 basis points which was a new record closing high. Nasdaq was up 0.17%. Russell 2000, which hasn’t hit a new record high yet, was down 0.52%.
Regional banks cratered as the KBW ETF was down 1.95%. VIX was up 2.34% to 12.68. However, surprisingly the CNN fear and greed index fell 7 points to 57 which is greed. None of the components changed their category.
Stocks Very Overbought
Earnings Season - Even though the CNN fear and greed index fell sharply, recognize that it doesn’t only include equity indicators. The stock market is still overbought and closing in on being extremely overbought. 83% of S&P 500 stocks are above their 50 day moving average.
As you can see from the top chart below, the 50 day moving average spread of the S&P 500 is in the high end of the overbought category.
Stocks are nearly the most overbought they have been this year. The bottom chart shows 59.6% of stocks are overbought and just 4.6% are oversold. That’s how stocks look heading into the heart of earnings season.
Earnings Season - Citi Beats EPS Estimates
Citigroup was the first major bank to report earnings. Citi reported $1.95 in EPS which beat estimates for $1.80. Excluding the positive impact of the IPO of the electronic bond trading platform Tradeweb, it had EPS of $1.83. It reported revenues of $18.76 billion which was growth of 2%.
There was a $350 million pretax gain. Which means without it, revenues would have missed the estimates of $18.5 billion. A slight beat on EPS and slight miss on revenues excluding one time events explains why the stock was down 6 cents to $71.71 on Monday.
This was an ok quarter with no surprises. Even though financials have lagged slightly this year, Citigroup has had an amazing year. Its stock is up about 33.96% (the XLF financials ETF is up 17.23% year to date).
Citi’s CFO’s prediction in June that trading revenues would fall in the mid single digits from last year was correct. Trading revenues without the IPO benefit fell 5%.
Equities trading revenues fell 9% to $790 million
Earnings Season - And fixed income trading revenue was up 8% to $3.32 billion.
Excluding the IPO benefit, fixed income revenues fell 4%. Investment banking revenue fell 10% to $1.28 billion.
Bank of America and Goldman Sachs will also show benefits from the Tradeweb IPO when they report results later this week. On Tuesday, Goldman Sachs, JP Morgan, and Wells Fargo will report results.
On Wednesday it’s Bank of America and on Thursday it is Morgan Stanley.
Earnings Season - Details Of Monday’s Action
3 sectors had losses on Monday. They were energy, the financials, and industrials which fell 0.93%, 0.53%, and 0.41%. Citigroup didn’t bring the financials down, rates may have.
10 year yield is down to 2.09% and the 2 year yield is at 1.83%. Odds of a 50 basis point cut on July 31st increased from 23% to 29.7%. Which is still below the 70% threshold necessary for the market to successfully predict a decision.
It’s very rare for there to be uncertainty right before the meeting. We’re at the point where if the Fed only cuts once, it will need to give substantially dovish guidance. Thus assuring the market that another cut is coming. I would be very surprised to see the percentage of a double cut get above 40%.
2 best sectors were the utilities and consumer discretionary. Utilities certainly love lower rates and lower economic growth estimates. I don’t think the Empire Fed index’s beat caused investors to be more optimistic on the economy.
Lowest Quarterly Chinese GDP Growth Since 1992
Earnings Season - Even though China’s GDP growth in Q2 fell from 6.4% to 6.2%. It was the lowest rate since data started being calculated in 1992, and the numbers weren’t terrible.
As you can see from the chart below, June industrial output growth was 6.3% yearly. It was above the prior growth rate of 5% and beat estimates for 5.2% growth. Retail sales growth increased from 8.6% to 9.8% which beat estimates for 8.5%.
Fixed asset investment growth was 5.8% in the first half compared to the 5.6% growth rate in the first 5 months of the year. There was a slight decline in real estate investment growth. It was up 10.9% in the first half compared to 11.2% growth in the first 5 months of the year.
China’s economy is positively responding to the government’s stimulus efforts. Lower real estate investment growth isn’t necessarily a bad thing as the government fears a property bubble.
Biden’s Progressive Healthcare Plan
Earnings Season - Joe Biden’s progressive challengers might not beat him in the primary, but they may have pushed his policy proposals in the progressive direction.
Specifically, in the last poll from The Hill, Biden was up 13 points on Sanders as Biden’s decline in the polls has ended. Biden’s healthcare plan calls for a Medicare Option, negotiated drug pricing for Medicare. And an expanded Affordable Care Act tax credit from the middle class.
As you can see from the image below, the healthcare sector doesn’t like his plan. They call it disastrous. It will be interesting to watch how this impacts the healthcare sector in the next 18 months. It is only up 8.37% this year. That's terrible for a market that is up 20.24%.
Earnings Season - Conclusion
Citigroup reported an ok quarter as its results were bolstered by a one time IPO. Goldman and Bank of America will also benefit from it. The stock market is very overbought headed into earnings season.
It would be disconcerting to see the market rally anymore unless earnings really destroy estimates. Based on FactSet’s data, if results beat estimates by the average amount, Q2 EPS growth will be 1%.
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