Earnings Season is Beginning to Reveal

Justin Freeman

Earnings Season

Wednesday was the biggest day so far for this round of US earnings releases. Although market reaction was relatively muted, the sight of different asset groups heading in different directions suggests fireworks could be just around the corner.

Goldman Sachs, Wells Fargo, Bank of America, Citigroup and JP Morgan Chase have all provided updates on Q2 trading performance, with ‘beats’ being the order of the day. All twelve of the S&P 500 firms which have so far reported have better than expected Earnings Per Share. It should be noted that data provided by Refinitiv, which goes back to 1994, shows that the historical average of firms that ‘beat’ sits at 65%, and they do so on average by 3.6%. This might explain why despite apparently positive numbers, that group of twelve stocks was down 0.56% post announcement.

US 500 Cash IG chart

Source: IG

The share price weakness extended to another asset group; smaller US firms represented by the Russell 2000 index. On Wednesday, the Russell was down a hefty 1.7%. A hit of that size is a worrying sign for the markets in general as the index is packed full of growth stocks and is a good barometer of investor sentiment.

US Russell 2000 Cash IG chart

Source: IG

Those pointing to some other major indices performing well on Wednesday may want to check their workings. The Nasdaq 100 closed at an all-time high, and Apple was up 2.4%. Given the size of Apple’s market capitalisation of $2.4trn, that involves a lot of cash flowing into the stock. The risk is that those moves reflect investors deciding positions in large tech stocks are the best way to weather any storm which might be building over the horizon.

That potential storm continues to centre around interest rates, inflation data and job numbers. On Thursday, another batch of corporate earnings will be released with Morgan Stanley, US Bancorp, Progressive, Cintas and United Health all releasing results, but that could be something of a side-show. The focus of attention will likely be on macro-data; specifically, the US Weekly Jobless Claims Report also due on Thursday.

Chair of the US Federal Reserve, Jerome Powell, will continue to testify to the Senate. On Wednesday, he shared some of the most significant points of his report and is so far sticking with the opinion that inflationary pressure is “transitory”. Powell said:

“At our June meeting, the Committee discussed the economy’s progress toward our goals since we adopted our asset purchase guidance last December. While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue.”

Source: CNBC

There could be an interesting run into the end of the week because as mid-week summaries go, this is a good one, full of record highs, growth stocks slipping, inflationary pressure and jobs numbers. Earnings season has brought volatility back to the markets but might not be the actual cause of it. Corporate reports appear to be a catalyst for big investors to realign their positions based on core economic fundamentals.

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Justin Freeman
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