Earnings are robust, but will it be enough?
That seems to be the question right about now in U.S. equity markets, as the rally hangs by a thread and investors cast a wary eye at the vaunted FANG contingent which fell into correction territory on Monday, down more than 10% from the mid-June highs. The FANG+ index has given back 9% in the days since the Facebook bloodbath. Apple is seemingly tech’s last hope in the near term. They report after the bell.
If tech does indeed roll over, the next question is who or what sector takes the baton. Suffice to say opinions vary. For their part, Morgan Stanley worries the answer is “nobody”. In a note out Monday, the bank suggested that something wicked this way comes.
Whatever the case, this comes amid record earnings, which I would say makes the dour mood ironic, but really it’s just a “sell the news” (or maybe “fade the news”) kind of thing. Through week three of earnings season, S&P EPS growth is tracking at nearly 24% and as BofAML’s Savita Subramanian writes, “overall, 76% of companies beat on EPS, 67% beat on sales and 58% beat on both—the second-highest proportion of beats on both metrics (and the highest proportion of EPS beats) following Week 3 in our data history since late 2011.”
Subramanian also notes that companies which beat on both the top and bottom line are being reward by 1.5ppt the following trading session, the most in seven quarters, while misses are getting pummeled by 3.6ppt the following day. The spread between those two data points is also the highest in seven quarters.
Oh, and when it comes to guidance, Subramanian writes that generally speaking, management is keeping an upbeat tone amid the trade worries although as documented here extensively over the past two weeks, the trade frictions are indeed affecting the outlook in all the places you’d expect them to (Monday’s examples include Caterpillar’s plans to raise prices to offset an expected $100-200 million in tariff-related costs and Tyson Foods’ guidance cut).
Finally, it’s worth noting that the tone of earnings calls is on balance beginning to move back towards the long-term average, something I wouldn’t even bother mentioning were it not for how sure-footed everyone was in Q317, Q417 and Q1 of this year following the tax cuts.