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The market has an earnings downside: Morning Transient

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Tuesday, July 13, 2021

Large earnings at the moment do not equal big returns tomorrow

The second quarter earnings season unofficially kicks off this morning, with Goldman Sachs (GS), JP Morgan (JPM), and PepsiCo (PEP) among the many first corporations out of the gate. 

And as we have chronicled over the previous few weeks right here on the Morning Transient, expectations have been rising forward of those outcomes, as analysts wrestle to maintain tempo with the fast-recovering enterprise cycle. 

However robust outcomes do not at all times accompany robust returns. Actually, they usually coincide with the alternative. 

12 months-to-date, “returns within the S&P 500 (+16%) have been solely pushed by rising earnings estimates (+21% YTD),” writes Savita Subramanian, fairness strategist at Financial institution of America International Analysis, in a be aware printed Monday. 

“However whereas quarterly earnings surprises and market returns have been correlated (32% since 1996), robust earnings don’t at all times translate to robust market returns. Traditionally, 60% of down quarters since 1996 (or 75% of down quarters ex-GFC) occurred in quarters with earnings beats. In 2000, regardless of earnings beating consensus for 10 straight quarters, the S&P 500 declined for 4 consecutive quarters.” (Emphasis ours.)

In 2020, the market rallied as traders started anticipating strong financial and earnings development. However the robust earnings we have seen this 12 months — and can see within the coming weeks — serve to validate final 12 months’s rally. It might not underwrite additional positive factors available in the market. 

Earlier this 12 months, the concept of “a number of compression” was a scorching one amongst strategists on Wall Avenue. The fundamental argument mentioned that because the financial cycle matured, traders would turn into much less inclined to pay up for added earnings development. In different phrases, any improve in inventory costs would should be accompanied by a good bigger improve in earnings development. A dynamic we have seen this 12 months, as BofA’s work exhibits. 

All of which served as one other reminder that what drives markets is anticipated — not realized — earnings, and financial development. 

And it is why we had Nick Colas at DataTrek Analysis in our inbox on Monday morning, writing within the headline of his newest be aware that “earnings season must be superior.” Wall Avenue analysts suppose earnings have been up 64% over final 12 months, in keeping with FactSet. However these positive factors have already been factored into inventory costs. 

What traders must see to maintain pushing inventory costs increased, then, is one thing new to imagine in. And that one thing new will should be higher than consensus expectations. 

By Myles Udland, reporter and anchor for Yahoo Finance Dwell. Observe him at @MylesUdland

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What to observe at the moment

Financial system

  • 6:00 a.m. ET: NFIB Small Enterprise Optimism, June (99.5 anticipated, 99.6 in Could)

  • 8:30 a.m. ET: CPI month-over-month, June (0.5% anticipated, 0.6% in Could)

  • 8:30 a.m. ET: CPI excluding meals and power month-over-month, June (0.4% anticipated, 0.7% in Could)

  • 8:30 a.m. ET: CPI year-over-year, June (4.9% anticipated, 5.0% in Could)

  • 8:30 a.m. ET: CPI excluding meals and power, year-over-year (4.0% anticipated, 3.8% in Could)

  • 2:00 p.m. ET: Month-to-month funds assertion, June (-$192.0 billion anticipated, -$864.1 billion in Could)


  • 7:00 a.m. ET: JPMorgan Chase (JPM) is predicted to report adjusted earnings of $3.14 per share on income of $30.06 billion 

  • 7:00 a.m. ET: Fastenal (FAST) is predicted to report adjusted earnings of 41 cents per share on income of $1.5 billion

  • 7:30 a.m. ET: Goldman Sachs (GS) is predicted to report adjusted earnings of $10.14 per share on income of $12.44 billion 

  • 7:30 a.m. ET: Conagra Manufacturers (CAG) is predicted to report adjusted earnings of 52 cents per share on income of $2.70 billion 

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