JPMorgan Chase, Citigroup, and Wells Fargo reported their second quarter results before the start of trading on July 13. Since that time, the S&P 500 has advanced 0.2%. That's not bad, yet it is far from a robust response to what has started as another robust earnings reporting period.
One Question, Several Answers
The blended second quarter EPS growth rate for the S&P 500 has increased to 21.0% from 20.0%. Meanwhile, the blended EPS growth rate for the financial sector has increased to 20.5% from 17.5%, according to FactSet.
There is no denying that the second quarter reporting period is off to a strong start. The question is, why hasn't the stock market reacted more favorably?
Some reasonable answers include the following:
- The S&P 500 increased 3.1% between July 3 and July 12, which leads one to think the good news was priced in already.
- Earnings guidance hasn't been unequivocally positive. The estimated Q3 EPS growth rate has been revised to 21.4% from 21.7% and that has piqued some concerns about reaching peak earnings growth.
- Buyers have lacked conviction amid continued uncertainty over matters pertaining to trade, interest rates, monetary policy, and the shape of the yield curve.
- There are festering concerns about a contagion effect from the bear market in China and the weakening in emerging market currencies.
- There has been a wait-and-see disposition in front of the earnings reports from Alphabet (GOOG: July 23), Facebook (FB: July 25), Amazon.com (AMZN: July 26), and Apple (AAPL: July 31).
A Big, Mega-Cap Week
The coming week could be a big week for the stock market.
President Trump will be meeting July 25 with Jean-Claude Juncker, President of the European Commission, who will reportedly try to work a deal with President Trump that averts the U.S. imposing a 25% tariff on imports of autos and components from the EU.
Beyond that political/economic factor, it will be a big week, literally and figuratively, on the earnings-reporting front.
Mega-cap stocks Alphabet, Facebook, and Amazon.com will be reporting their results, with investors keen on determining if those results justify the outperformance of their stocks. Amazon.com will arguably have the tallest order there considering it is up 55% year-to-date while Alphabet and Facebook are up 13% and 19%, respectively.
Netflix (NFLX) demonstrated what can happen when a growth/momentum stock fails to live up to high expectations. Its stock dropped as much as 14.1% following the company's report of a second quarter subscriber growth shortfall that was largely the result of its own forecasting error. NFLX has recovered a bit since then, yet it is still down close to 10% since the company released its results.
If there was a silver lining in the cloud hanging over Netflix, it was the idea that the disappointment from that growth-stock darling might have opened the market's eyes to stocks with less demanding valuations.
With that, it made sense that the financial sector exhibited relative strength in the past week as stocks in that space certainly carry less demanding valuations.
What It All Means
Most expect Alphabet, Facebook, and Amazon.com to post impressive results. The real uncertainty for the broader market is how those mega-cap stocks will respond in the wake of the results.
Will they rally and help the S&P 500 make a move toward the all-time high it set in January (2872.87) or will they retreat and stand in the way of a broad market breakout effort?
In turn, would a disappointing response in those stocks foster a rotation into other stocks or would a disappointing response serve as a broader selling cue predicated on concerns about difficult comparisons and peak earnings growth?
These are some big questions befitting a big week that will be governed by the interplay between political and market forces.
For the time being, though, it is fair to say that the stock market is following the first quarter reporting template of taking an immutable stance in the face of strong earnings results.