Market Direction Week of October 21, 2019: Earnings this Week

Market Direction: BEARISH alert issued 10/3/2019



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Market Direction Week Review: U.S. stocks ended modestly higher as better-than-expected earnings and optimism around Brexit were offset by ongoing global growth concerns. The third-quarter U.S. earnings season kicked off last week, with major banks reporting solid earnings against depressed investor expectations, leading the group higher. Also helping investor sentiment was the news that the EU and U.K. agreed on a Brexit deal after days of negotiations. However, uncertainty remains as the deal will need to be approved by Parliament over the weekend. On the negative side of the ledger, U.S. retail sales disappointed, and the International Monetary Fund (IMF) once again lowered its projections for global growth this year from 3.5% to 3%. We continue to believe that consumer spending remains well supported and that global growth will stabilize, but we also expect volatility to increase in line with historical averages. 

Trade negotiations between the U.S. and China remain stubbornly slow, but that’s nothing new and it feels like investors want to look past this issue, provided earnings and global growth can hang in there in the meantime. Speaking of global growth, the IMF lowered its 2019 global GDP growth estimate to 3.0% yesterday, from a +3.2% forecast back in July, at yesterday’s IMF Annual Meeting. The organization said it expects global growth to rebound to +3.4% in 2020, but noted that further slowing is forecasted in the U.S., China and Japan, driven by issues with trade. Separately, China reported Q3 GDP of 6.0%, below the 6.1% expected, which represents the slowest pace of growth in over 27 years. From a positive perspective, the slowing in global growth appears to be drawing more calls for fiscal stimulus, which could be a positive future catalyst, but for now investors are still left wondering how long growth can be sustained as long as trade uncertainty restricts both growth and business confidence.

How the market finished last week, the S&P 500 up 0.5%, the Nasdaq up 0.4%, and the Dow down 0.2%.

 

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Market Direction This Week: We track the stock market based on our Bullish and Bearish Alerts a new Bearish Alert recently started on 10/3/19 and we suggested to our followers not to trade any new long positions. We will continue to provide you the current stock market conditions as they develop. The current stock market environment is in a correction trade with caution (see Market Direction Mid Week Update: Trading Strategies).

It’s all about earnings this week for the markets, as about a quarter of the S&P 500 companies gear up to report results.

Through Friday, about 18% of the S&P’s market cap reported earnings. “Earnings are beating by 4.9%, with 78% of companies exceeding their bottom-line estimates. This compares to 5.4% and 71% over the past 3 years,” Credit Suisse strategist Jonathan Golub pointed out in a note Friday.

While earnings season has been off to a positive start with big banks delivering solid results, some strategists warn that it is too early to brush off concerns of negative earnings growth. “As any seasoned runner knows, an aggressive pace out of the gate may be difficult to maintain,” Raymond James Chief Investment Officer Larry Adam wrote in weekly note to clients Friday. “As we cautioned last week, headline earnings were expected to decline 4% year-over-year (YoY) in 3Q19, and although earnings typically beat estimates by ~4%, it is likely to ‘come down to the wire’ on whether or not we can skirt negative earnings growth. The next two weeks should provide additional insights, as 284 companies representing ~66% of the market capitalization of the S&P 500 are set to report.”

Adam explained that the tech sector will be a key group to watch this earnings season and reiterated the firms positive outlook on the sector. “There are growing concerns that the slowdown in global economic momentum and the US-China trade war could start to impact the [tech] sector’s earnings,” Adam noted. “Earnings expectations were revised lower by 1.46% in the preceding three months, but that is substantially less than the 3.87% downward revision for the broader market. Over the last ten quarters, the Technology sector has seen the second largest earnings beats at 6.8% and we expect similar success this quarter. Headline risk (e.g., anti-trust debate) could present an opportunity to add exposure, and we maintain our positive outlook on the sector as it has historically been the top performer in an ‘insurance’ rate cut environment.”

Meanwhile, the economic calendar for this week is rather light, and the Federal Reserve will be entering its quiet period ahead of its scheduled policy meeting at the end of this month.

New home sales and durable goods orders will be in focus for investors on Thursday.

Economic Calendar: Existing Home Sales (10/22), Durable Goods (10/24), University of Michigan Consumer Sentiment (10/25)

Some of the major earnings announcements on deck: PG, MCD, MSFT, BA, AMZN. 

 

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