Net Earnings Statements Turn Negative Worldwide

Net Earnings Statements Turn Negative Worldwide
(Friday Market Open) Stock index futures turned upward this morning following two days of congressional testimony from Federal Reserve Chairman Jerome Powell and lower expectations for home sales that seemed to settle investors’ nerves. Technology stocks were making an early comeback amid slightly lower bond yields as we approach the end of another volatile week.

Potential Market Movers

After the open, we’ll hear final June University of Michigan Consumer Sentiment numbers, which notably fell to their lowest levels ever two weeks ago. But today’s new home sales numbers for May could take center stage as rising rates and stubbornly high real estate prices are a focal point in the Fed’s battle against inflation.

Some economists and analysts expect home sales might be cooling with the side benefit of chilling inflation fears as well.

Fed Chair Powell’s firm stance on fighting inflation during congressional testimony Wednesday and Thursday—and a few economic reports indicating a slowing economy— seemed to quiet the market going into Friday’s session. The S&P Global Manufacturing PMI managers index hit a five-month low on Thursday.

In premarket trading, stock futures moved upward. Dow Jones futures edged up 0.67%, S&P 500 futures gained 0.64% and Nasdaq futures advanced 0.75% near the open. The S&P 500 is now up above 3% for the week, but it is still in bear market territory.

The Cboe Market Volatility Index (VIX) was hovering around 29 before the opening bell.  

Stocks making news before the market open include:
  • CarMax (KMX) announced this morning it beat estimates on both sales and earnings in its latest quarter. After rising more than 2% yesterday, shares were down 0.11% before the open.
  • FedEx (FDX) gained3.31% in after-market trading after issuing positive guidance for 2023.
  • Seagen (SGEN) rose 3.46% premarket after the Wall Street Journal reported that Merck (MRK) is moving ahead with its acquisition offer for SGEN.

Reviewing the Market Minutes

The fear of recession had commodity traders continuing to sell futures around the oil complex. WTI crude oil futures settled 1.7% lower on Thursday to $104.24 per barrel, natural gas futures plunged 8.9%, and unleaded gasoline futures tumbled 1.8%.

Bearish sentiment appeared to be driving bond prices higher and yields lower as investors keep moving toward safe havens. The 10-year Treasury yield (TNX) fell nine basis points to 3.07% and the 2-year Treasury yield dropped four basis points to 3.01%. The 10-year yield is nearing the 2-year yield which means the yield curve is flattening once again—for many investors, a sign of a weakening economy.

Despite those negative signs in the futures and bond markets, stock still traded higher on Thursday with the Nasdaq Composite ($COMP) rallying 1.62% on the day. It was followed by the S&P 500 (SPX) rising 0.95% and the Dow Jones Industrial Average ($DJI) increasing 0.64%. However, beyond the indexes, investors were favoring defensive sectors because utilities, health care, real estate and consumer staples were the top performers for the day.

Thursday’s economic reports revealed new signs that the economy is slowing. Weekly jobless claims were greater than expected, remaining near a five-month high—a possible sign that the red-hot job market is cooling a little. S&P Global Manufacturing PMI came in at its weakest level since January and its second weakest point since mid-2020.

As Fed chairman Powell finished up his second day of congressional testimony in front of the House Financial Services Committee, he reiterated the Fed’s commitment to bring down inflation but conceded that a recession is a real possibility.  

CHART OF THE DAY: WORLDWIDE WORRIES. The Dow Jones Global Index ($W1DOW—red/green) has fallen 22% from its all-time highs and back to late summer 2020 levels. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results. 

Three Things to Watch

Revisions Go Global: Net earnings revisions are negative around the world, according to Yardeni Research. The three-month moving average of forward earnings revisions for the All Country World MSCI Index shows net negative revisions for Q2 going through the end of May. This represents two consecutive quarters of net negative revisions. When excluding U.S. stocks, the revisions are even more negative.

The net earnings revisions for the S&P 500 have fallen dramatically since 2021 but remain net positive. Additionally, the S&P 500 saw an increase in net revisions from April to May. Similarly, Europe has also seen a dramatic decrease in net revisions but remains positive despite slipping into the negative in April.

Around the Corner: The unofficial kickoff of the Q2 earnings season will start the week of July 11 with several large banks reporting. According to FactSet, the estimated Q2 earnings growth for the S&P 500 is 4.3%–the lowest growth rate since Q4 of 2020. Between March 31 and June 15, the estimated growth rate fell from 5.9% to 4.3% due to analysts’ revisions. FactSet reports that 72 of the S&P 500 companies have issued negative earnings guidance against 31 issuing positive.

Meanwhile in Europe: Earnings season in Europe works a little differently as reports from various countries trickle in on an extended schedule. Data tracked by Refinitiv found that European companies making up the STOXX Europe 600 are expected to grow 42% from Q1 2021, but growth narrows to only 22.9% when energy companies are excluded. Of the 600 companies, 273 have reported earnings and 66.3% of them have beat earnings estimates— well above the historical average of 52%. Meanwhile, 325 of the STOXX 600 companies have reported revenues with 77.2% beating analyst estimates. This is also above the historical average of 57%.

The highest growth rates were in energy with consumer cyclicals and basic materials a distant second and third. Looking at growth rates by country, Norway, Austria, France, and Netherlands were the highest. Firms in energy and consumer cyclicals reported the highest number of positive earnings revisions for the quarter.

Overall, the STOXX  600 index has fallen nearly 18% year-to-date because many European countries took longer to reopen from the pandemic, are dealing with high inflation rates, and some countries are seeing higher yields even though the European Central Bank hasn’t raised rates yet. 

Notable Calendar Items

June 27: Durable Goods Orders, pending home sales, and earnings from Nike (NKE)

June 28: CB Consumer Confidence

June 29: Gross domestic product (GDP) and earnings from Paychex and (PAYX) General Mills (GIS)

June 30: Initial Jobless Claims, PCE inflation, Chicago PMI, and earnings from Walgreens Boots (WBA), Micron (MU), and Constellation Brands (STZ)

July 1: ISM Manufacturing PMI

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Unsplash

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