Q2 S&P 500 EPS Expected To Fall 0.3%

Q2 S&P 500 EPS - Amazing June Continues

Interesting numbers are coming out for the Q2 S&P 500 EPS. June has been a great moth as May was a blip on the radar for this year thus far. Investors expected the market to wait for either a dovish Fed or great economic reports before rallying or possibly falling. However, investors proved me wrong as the S&P 500 increased 0.41% on Thursday to its highest level in June. 

S&P 500 is up an astounding 5.07% month to date after falling 6.58% in May. It’s now down just 1.84% from its record high late in April. It feels like there’s nothing stopping this market. However, we can’t go by feelings to project where stocks are headed.

Sentiment Readings

Q2 S&P 500 EPS - CNN fear and greed index jumped 5 points to 39 as it is at the upper edge of the fear category. We’re in a weird situation where many investors and economists are bearish on the economy, but many feel it’s inevitable that stocks will move higher. Oddly, it seems like few care about weak economic growth or low earnings growth, which I will get to later in this article.

As you can see from the chart below, as of last week, investors were less bullish than average. 26.8% of individual investors were bullish and 34.2% were bearish. After the recent rally, a few more investors switched to being bullish. If I was bullish on the economy, I would love these numbers because it signals there is more room to rally. 

Now it just confuses investors because we have low single digit earnings growth, potentially below 2% GDP growth, a trade war, and a stock market that’s up 15.35% year to date.

Details Of The Tape

Q2 S&P 500 EPS - Nasdaq rose 0.57%, Russell 2000 rose 1.05%, and VIX fell 0.57% to 15.82. Jobless claims report was strong again. But the market has ignored the weak BLS headline reading, the weak ADP report, and the high number of job cuts. Poor economic results mean the Fed will cut rates and good results mean the slowdown is over. Bulls can’t lose!

A big news event on Thursday was that two oil tankers in the Gulf of Oman were attacked. This caused WTI oil to increase 2.2%. It also caused the energy sector to rise 1.25% as it was the best performer on the day. Oil and the stock market have had an extremely high correlation in the past few years. But it has waned in the past few months as stocks have risen and oil has fallen. Lower oil prices are great for the consumer, but the reason for the decline, namely weaker economic growth, isn’t.

Every sector was up except healthcare which fell 11 basis points. The healthcare sector is within 2% of its 52 week high, but it might get spooked by the latest Democratic primary polls which have Elizabeth Warren gaining steam and Joe Biden losing popularity. 

Latest poll from the Economist has Warren at 16 points and Biden at 27 points. She’s now in second place and his lead is down to 11 points. She gained 4 points from the previous Economist poll a week earlier and he was stagnant. Biden’s RealClearPolitics average is almost down 10 points in the past month.

Q2 S&P 500 EPS - Earnings Estimates Stagnate

There is no doubt that the soft decline in S&P 500 EPS estimates in June is a major positive for stocks. I’m only questioning how that relates to stock market performance. Sure, estimates not falling is good news. But EPS growth will probably in the mid to low single digits and the market has risen over 5% in less than half a month. 

Usually estimates don’t fall much in the 3rd month of the quarter because not many earnings reports come out. So far in June, estimates have fallen 20 basis points to -0.3%.

In March, Q1 estimates fell 73 basis points to -0.66%. The performance is slightly better this month. If estimates are beaten solidly like in Q1, then we might see mid single digit growth. I expect estimates to beat by slightly less because the economy is weak. My expectations will change after Friday’s economic reports.

May Import & Export Prices Very Weak

Q2 S&P 500 EPS - Import and export prices support the decline in inflation seen in the May CPI report. The Fed will have no trouble cutting rates in July or September. Interestingly, the odds for a rate cut on Wednesday have increased. That’s with the stock market near its record high. This goes along with my point earlier that stocks are rallying despite the economic slowdown. 

Odds of a rate cut on Wednesday are 30.8%. If odds rise any further this will be very unusual because most of the time the market already knows what the Fed will do. This time it’s uncertain. 70% odds virtually guarantee a rate cut. We aren’t there yet and I still expect the Fed to stand pat.

As you can see from the chart below, import prices were down 1.5% yearly. That missed estimates for -1.3% and the prior reading of -0.3%. Export prices also fell as growth was -0.7% which missed estimates for no growth and April’s growth of 0.2%. The reference period of this report was right before America increased tariffs on $200 billion of Chinese goods.

Q2 S&P 500 EPS - Conclusion

The stock market has had a great June even though there is still a trade war with China and economic growth is weak. EPS estimates aren’t falling quickly, but expected growth is very low. We will probably see around EPS 4% growth in Q2 and somewhere between 5% to 7% growth in all of 2019. 

Stock market is up over double that just in the first half. Fed probably won’t cut rates in June, but the Fed funds futures market has made it interesting. On the one hand, the Fed hasn’t reacted to this rise in the chances of a cut by coming out and saying it won’t cut. On the other hand, it would be weird to tell us what the decision will be a few days before the meeting. 

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