“Beatable” Earnings Estimates Could Fuel Parabolic Rally

Markets started off on a positive note this week as Wall Street battened down the hatches for earnings from America’s top stocks. The Dow traded higher by 68 points, or 0.2%, while the S&P and Nasdaq Composite edged up by 0.3% and 0.7%, respectively, through noon.

It’s going to be an interesting second-quarter earnings season with reports slated from financial heavyweights like Bank of America, Morgan Stanley, and Goldman Sachs. Moreover, results from United Airlines, Las Vegas Sands, Tesla, and Netflix could serve as potential “tone-setters” for several key industries.

Despite the positive start, Wall Street is anticipating a potentially turbulent earnings season with projections of a 7% decline in S&P 500 earnings compared to last year. This week also marks the beginning of the Fed’s “blackout period” in the run-up to its July policy meeting that wraps up on the 26th. Traders are projecting a 97% likelihood that Powell & Co. raise rates at the conclusion of that meeting according to CME Group’s FedWatch tool. The presumed hike would come after the Fed skipped raising rates in June.

Markets are continuing their bounce back after a strong week that saw the Dow Jones Industrial Average rise by 2.3%, its most significant weekly gain since March. The S&P 500 jumped by 2.4% while the Nasdaq Composite outperformed, climbing 3.3%.

Ed Yardeni, president of Yardeni Research, commented on the state of the market, saying, “I think the market is kind of overjoyed with the disinflationary, soft landing scenario. I’ve been thinking for quite some time that we’re in a recession, but I argued that it’s a rolling recession, not an economy-wide recession. Now I think we’re in a rolling recovery.”

Yardeni’s opinion isn’t shared by all; some analysts would argue that the recession has merely been delayed by “stealth QE” payments to big banks via the reverse repo market, which has unintentionally counteracted much of the Fed’s ongoing QT efforts.

On the European front, the Stoxx 600 – the broader European index – enjoyed its best weekly surge since March, buoyed by cool US inflation. But many Wall Street strategists still believe markets are overestimating the resilience of the global economy.

Barclays strategists led by Emmanuel Cau commented on European markets, saying, “US investors are very bearish on Europe. Consistent with the flows data we track, most US clients we met have cut exposure to Europe, on the view that the region is the most vulnerable to central banks-induced recession, will lose from a weaker-for-longer China, and has missed the AI train.”

Mark Haefele, CIO at UBS Wealth Management, believes a lot of optimism about the US economy is already priced in, stating, “In the second half, we expect an environment where inflation continues to fall, but growth also slows, potentially close to zero. That situation is good for bonds, but generally not equities.”

Bank of America’s resident bear Michael Hartnett, who was lights out with his predictions in 2022, saw stocks peaking in May of this year prior to a rough second half for bulls. Things haven’t gone as expected for Hartnett, but his long-term outlook remains the same.

“We say 2023 disinflation to prove transitory,” Hartnett explained, adding that he anticipates a rise in real rates. Hartnett does not believe that US bond yields can fall below 3% without a “very hard landing” for the economy.

Short-term, however, Hartnett sees additional upside for equities as investors put their cash to work. Up until now, many investors have been happy to park their cash in high-yielding money market funds.

Generating almost 5% in annual interest isn’t nearly as enticing as chasing a FOMO rally, though. And that rally could go parabolic if companies surpass their very “beatable” earning estimates later this week, even if the market looks overbought short-term.


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