The S&P 500 swooned as low as 1,991, the lowest level since March. But now the S&P has surged right back to 2,100, within striking distance of new highs again.
And the stock market’s fear gauge, the CBOE Volatility Index, spiked up to 26 before collapsing right back to under 15, near the lowest levels of the past few years.
Markets are indeed moving faster these days, blink and you’ll miss all the fun.
Judging from this rapid reversal, apparently all is right with the world again, business as usual, so go on about your investing like nothing happened.
Perhaps, but we may not be out of the woods just yet!
After tomorrow’s market-moving jobs report, the next big milestone event is second-quarter earnings reports, which begin rolling in over the next few weeks.
Stay alert, because corporate profits will be key
to the direction stocks take in the second half of the year!
First the bad news: Corporate profits are in the midst of the longest recession since the Great Recession in 2008-09. S&P 500 earnings are forecast to continue the losing streak in Q2, with profits down 5.3% from the same period last year, according to data from FactSet research.
Now the good news: While sales and profit results remain depressed, the potential silver lining is that earnings estimates are no longer plunging. In fact, profit estimates have done a U-turn in recent months.
Remember, when it comes to earnings, it’s all about the forward-looking estimates, much more so than the actual results.
And the three-month ratio of positive-to-negative profit forecasts improved in March, April and May, before turning slightly lower in June, according to Merrill Lynch data (see chart below).
In other words, profit forecasts are getting less bad, and this improvement is a bullish sign.
Stocks tend to closely follow the so-called earnings revision ratio (ERR), which is near its highest level since late 2014, when the slump in S&P earnings began. The ratio is trending well above its long-term average, which means the corporate profit outlook is steadily improving.
This means the profit slump may be coming to an end, which could give stock prices a big boost going forward.
Historically, when the ERR is trending above its long term average, stocks have posted annualized gains of 11%, according to Merrill Lynch research. That compares to yearly returns of just 6% when the ERR is below average; a significant difference.
Drilling down to the sectors and stocks that are showing the biggest improvement in profit trends, the chart above tells us health care, consumer staples, basic materials and energy are doing all the heavy lifting, with positive ERR over the past three months.
No surprise that these have also been the best-performing sectors recently. And the stocks in these sectors are great candidates for positive earnings surprises over the next several weeks. Stay tuned.
Australia’s political deadlock is jeopardizing the country’s credit ratings, jeopardizing its reputation as a pillar of financial stability, The New York Times reports. The Standard & Poor’s credit-rating firm warned that it could strip the country of its top-grade investment rating in the next two years. S&P cited, among other reasons, the inconclusive results of Australia’s election Saturday. That vote left no clear winner to help deal with the country’s budget issues. Australia has a population of about 24 million and has the world’s 12th-largest economy, the report says.
According to The Times, the raw-material rich country hasn’t had an official recession in 25 years. It is one of the few remaining Triple-A rated countries – a position the U.S. lost five years ago. Only 10 countries now hold that rating from the three major ratings agencies. Australia has been hit by the slowdown in China and the drop in energy prices. In recent election, the Liberal National coalition barely managed to move back into office with 76 seats in the 150-seat House of Representatives. However, Prime Minister Malcolm Turnbull lost his significant majority in the lower house and will struggle to deal with a Senate likely to be dominated by minor parties, weakening the ability of major parties to push through changes, The Times says.
U.K. Chancellor George Osborne set out on a charm offensive, hoping to convince international banks to remain in the U.K. after the Brexit vote. Osborne met with senior figures from Goldman Sachs, Standard Chartered, Morgan Stanley and Bank of America Merrill Lynch, stressing the need to ensure that London remained one of the globe’s key financial centers. After the meeting, Osborne and the bankers vowed to cooperate in a joint statement:
“We will also work together to identify the new opportunities that may now become available so that Britain remains one of the most attractive places in the world to do business.
“It has one of the most stable legal systems in the world, a brilliant workforce and deep, liquid capital markets unmatched anywhere else in Europe, all of which are underpinned by world-class regulators.”
Good news on the corporate front: PepsiCo. Inc. reported second-quarter profit above analysts’ estimates and raised its full-year forecast as sales of snacks and soft drinks in North America helped offset weaker results abroad. PepsiCo has increased its “better-for-you” offerings in light of declining soda consumption in the U.S. and other markets, Bloomberg reports. The company announced a partnership with smoothie maker BarFresh Food Group in October and introduced a line of healthy vending machines in December.
Add your views on these or any other issues below.
The Money and Markets Team
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