Equity Index Futures Trim Overnight Gains As Bulls Try To Charge

Equity Index Futures Trim Overnight Gains As Bulls Try To Charge

Yet overnight, equity index futures were well off their highs. After yesterday’s drop, investors may be realizing that they simply had gotten too carried away with the Fed’s suspected dovishness and now the market may be swinging back to more realistic expectations. As I said yesterday, Fed chair Jerome Powell has an opportunity to reset expectations on Friday at the Fed’s annual policy conference in Jackson Hole, Wyoming.

Investors appear to be calming down a bit as the Cboe Market Volatility Index (VIX) pulled back in premarket action. However, the 10-year Treasury yield (TNX) was slightly higher which is helping to boost the U.S. Dollar Index ($DXY). Higher yields and a stronger dollar were catalysts for yesterday’s selloff, so these are issues to keep an eye on.  

European markets were also weaker this morning as the FTSE 100 slid 0.68% and the Stoxx Europe 600 fell 0.34%. English, French and German manufacturing reports were lackluster and did little to assuage recession fears. With Europe’s elevated fuel prices as the continent heads into winter, economic conditions could worsen. 

Earnings season continues with several mixed reports. All returns took place in the premarket session.

  • Medtronic MDT was able to overcome forex earnings reductions in overseas revenues to top earnings estimates with a 22% increase in net income compared to a year ago. MDT was up 0.55%.   
  • JD.com JD also beat on top- and bottom-line numbers prompting the stock to rally 6% overnight. But the Chinese e-commerce platform gave back much of its gains to trade a little more than 2% higher before the opening bell.
  • Palo Alto Networks PANW rocketed 9.92% after beating earnings and announcing a 3-for-1 stock split.
  • Zoom ZM fell 11% early Tuesday after lowering its profit guidance for the full year. ZM did beat earnings expectations despite lower-than-expected revenues.
  • J.M. Smucker SJM topped earnings expectations while meeting revenue estimates. SJM also raised their outlook which helped the stock to rise 1.81%.
  • Macy’s M beat expectations but cut its full-year earnings guidance due to macroeconomic problems. However, the stock rallied 2.3%.
  • XPeng XPEV tumbled 4.6% after the Chinese electric vehicle maker reported a wider-than-expected loss.
  • Advance Auto Parts AAP missed on earnings estimates despite beating revenue estimates. The stock still rose more than 2% as J.P. Morgan JPM maintains its Buy rating on the stocks.  
  • Dick’s Sporting Goods DKS topped estimates for top- and bottom-line numbers and increased its forward guidance causing the stock to rally 1.4%.

Twitter TWTR was down 3.8% in premarket trading after ex-Twitter security chief blows the whistle on the company’s weak cybersecurity policies. According to CNN, Peiter “Mudge” Zatko alleged that the company’s security practices are “chaotic,” “reckless,” and “negligent” and allow too many people access to user’s private information.

After the market open, the U.S. Census Bureau will release its monthly new home sales report for the month of July. Analysts are forecasting 660,000 homes sold which would be higher than the previous month of 642,000. However, the report has missed to the downside five of the last seven months. Additionally, homebuilder Toll Brothers TOL is schedule to report earnings after the closing bell. 

Reviewing the Market Minutes

Interest rate fears that crept in last week moved stocks Monday to their worst day since June 16 with the Cboe Market Volatility Index (VIX) spiking more than 15% to settle back near 24.

Stocks traded lower across all major indexes led by the Nasdaq ($COMP) that fell 2.55%. The S&P 500® index (SPX) tumbled 2.14% and the Dow Jones Industrial Average ($DJI) dropped 1.91%.

It means even more attention for the Friday kickoff of the Federal Reserve’s annual Jackson Hole Economic Symposium where Fed chair Jerome Powell is scheduled to speak on Friday. The appearance will give him a chance to reset interest rate expectations that appear to have shifted several times in the past few weeks. 

With so many renewed concerns around the size and pace of future rate hikes, the bond market was busy Monday with the 10-year Treasury yield (TNX) up five basis points to 3.04%. The 2-year Treasury yield was up nine basis points to 3.33%. The rising yields strengthened the dollar as the U.S. Dollar Index ($DXY) finished 0.72% higher on the day and creating a new 52-week-high closing price.

The strong dollar has been a bane for mega-cap investors all year and was a headache once again on Monday. The CRSP U.S. Mega-cap Index plunged 2.16% as investors worried that exchange rates would continue to be a problem for multinational company earnings.

The rising yields caused investors to revalue stocks once more, which hit growth stocks hard. The S&P Pure Growth Index dropped 2.19%. However, value stocks weren’t immune to revaluations either as the S&P Pure Value Index also slid 1.92%.

All market sectors were lower on the day led by consumer discretionary and technology. Energy saw the lowest losses thanks to strength in oil prices. But NYSE decliners outpaced advancers about 5 to 1. 

CHART OF THE DAY: GAME STOPPAGE. The Cboe Market Volatility Index (VIX—left) tested its June lows on Monday as investor fears were rekindled around the interest rate environment. The S&P 500® index (SPX—right) finished just below its June peak. The bulls and the bears are likely to battle over these lines the rest of the week as investors hope to gain clarification from Federal Reserve chair Jerome Powell on Friday. 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

BACK-TO-SCHOOL SPENDING: According to a recent survey by RetailMeNot, inflation is changing back-to-school spending habits. Shoppers were planning on spending 21% less on electronics this year compared to 2021—a difference of $100. However, spending on back-to-school supplies was expected to rise 55%, an increase of nearly $70. Clothing was about the same, increasing only 2% compared to a year ago and shoe shopping expenditures was expected to decrease 4%.  

The National Retail Federation (NRF) found that families were planning on spending an average of $864 on school items, just $15 higher than the previous year. It’s a much smaller percentage increase than the 7.5% overall gain Mastercard Spending Pulse had forecast for the season back in June.

BIG BACK-TO-SCHOOL BUSINESS: Many parents spend more on back-to-school than gifts for their kids at the holidays. According to Capital Counselor, the average American spends $276 per child under 18 for Christmas. This is much less than what the NRF was reporting for back-to-school shopping. However, total back-to-school spending is expected to reach $11 billion which is relatively small compared to the $859 billion spent for everyone during Christmas.

Nonetheless, you can see that back-to-school shopping is big business for retailers and how it plays out in their Q3 earnings reports.

POST-PANDEMIC PURCHASING: According to Refinitiv, the blended earnings growth rate of the combined retail sector in the second quarter was -6.3%. On the top end of that spectrum was the Hotels, Restaurants, and Leisure group with an astounding 411.5% earnings growth rate. It was followed by a 36.5% rate in Household Durables, 13.2% for Distributors, and 12.3% for Leisure Products.  

For the worst earnings growth rates within the broad retail group, Internet and Catalog Retail fell 115.6%, Multiline Retail lost 51.7%, Personal Products slid 22.9% and Textiles, Apparel and Luxury Goods finished down 6.9% in Q2.

However, internet sales are picking up again. Target TGT expected to see digital sales grow 5% in Q2 but reported a 9% increase. Lowe’s LOW beat its 0.9% digital estimate with a 7.0% increase, and Home Depot HD beat its 1.3% projection with a 12.0% gain in online sales. Walmart WMT fell short of its 18.3% estimate but still experienced 12% growth online.

Notable Calendar Items

Aug 24: Durable goods orders, Pending home sales, and earnings from Nvidia (NVDA), Salesforce.com (CRM), Snowflake (SNOW), and Autodesk (ADSK)

Aug 25: Gross domestic product (GDP) and earnings from Dollar General (DG), Workday (WDAY), Dollar Tree (DLTR), Ulta Beauty (ULTA), Burlington Stores (BURL), and Gap (GPS)

Aug 26: Fed Chairman Jerome Powell speaks at Jackson Hole, PCE price index, Michigan Consumer Sentiment, Personal Income, and earnings from Marvell Technology (MRVL) and Dell (DELL)

Aug. 29: Dallas Federal Reserve Manufacturing Index

Aug 30: CB Consumer Confidence, JOLTs Job Openings and earnings from Crowdstrike (CRWD), Hewlett Packard (HPE), Chewy (CHWY), Best Buy (BBY), and Big Lots (BIG)

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

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