Monday, July 24, 2017

Stocks Brace For Volatility In Earnings Deluge; Fed Meeting Looms

Nearly 200 companies on the S&P 500 to report results.


By Wallace Witkowski
MarketWatch
July 24, 2017

With nearly a fifth of quarterly earnings results out, investors are divided on how early corporate reports are serving as an indicator of the overall health of the U.S. economy, and that could contribute to a volatile week as stocks linger near record highs.

On Friday, stocks finished lower with the Dow Jones Industrial Average DJIA, -0.15% declining 0.3% for the week, and the S&P 500 index SPX, -0.04% and the Nasdaq Composite Index COMP, -0.04% posting weekly gains of 0.5% and 1.2%, respectively.

Earnings so far are confirming less-than-stellar economic data recently, said Paul Nolte, portfolio manager at Kingsview Asset Management. While some early reporting banks topped profit expectations, loan activity is still not robust, while revenue weakness from companies like International Business Machines Corp.IBM, -0.39% are cause for concern, he said. Plus, a less-than-rosy profit outlook from General Electric Co. GE, -2.92% on Friday added to concerns.

Some of the economic factors being confirmed by earnings so far are weak inflation, and a softening of industrial production numbers like the Fed’s Philly manufacturing report and Empire State manufacturing index, Nolte said.

In fact, that weakness may find its way into commentary from the Federal Reserve’s two-day Federal Open Market Committee meeting, which finishes up on Wednesday. Nolte said he’s going to be concentrating on comments concerning unraveling the Fed’s $4.5 trillion balance sheet and how the Fed may start to favor that as a tightening measure over rate hikes.

With respect to the overall market, Nolte expects a continuation of the weak dollar DXY, -0.03% and how that will make international stocks more attractive. As investors continue to prop up record prices in U.S. stocks for lack of a better alternative, Nolte sees an inevitable correction in the works, but cautions that there’s no real way to time it.

“The market is like a balloon floating around looking for a pin,” Nolte said.

On the flip side, that may be a glass-half-empty viewpoint. Financial stocks finished lower for the week, with the Financial Select Sector SPDR ETF XLF, +0.00% off 0.5%, following major bank reports but the sector is still poised for double-digit earnings gains this season even in a low-interest rate environment, said Karyn Cavanaugh, senior market strategist at Voya Financial.

“The reaction to banks was that people didn’t like the composition of the earnings,” Cavanaugh said. “The bottom line is that financials have been getting the dirt sandwich lately, and they’re poised for gains once there is a policy change.”

With regards to the Fed’s meeting, Cavanaugh said it would be important to note if the Fed’s tone pivots from its recent dovish bent. Following perceived dovishness from Fed Chairwoman Janet Yellen before Congress last week had a hand in boosting markets, but the Fed is also mindful it needs to build up its toolbox to deal with the next economic downturn.

“If the Fed appears more hawkish, then that could rile markets,” Cavanaugh said. “The Fed’s intent on raising rates because they need the dry powder, that’s probably the most important thing.”

Nearly 200 companies on the S&P 500 are expected to report in the coming week. Among the largest companies reporting are Google parent Alphabet Inc.GOOGL, +0.17% GOOG, +0.49% on Monday; McDonald’s Corp. MCD, -0.19% and AT&T Inc. T, -0.03% on Tuesday; Facebook Inc. FB, -0.06% Coca-Cola Co.KO, +0.47% and Boeing Co. BA, +0.88% on Wednesday; Amazon.com Inc.AMZN, -0.29% Comcast Corp. CMCSA, +0.35% Intel Corp. INTC, -0.06% and Procter & Gamble Co. PG, +0.01% on Thursday; and Exxon Mobil Corp.XOM, -0.92% , Chevron Corp. CVX, -1.32% and Merck & Co. MRK, -0.49% on Friday.

Earnings for the S&P 500 are tracking at an estimated 7.2% growth for the second quarter with about 20% of companies having already reported, according to John Butters, senior earnings analyst at FactSet.

That figure, however, can be a little misleading given that energy earnings are expected to rise more than 300% from the year-ago quarter. Only the tech sector and the financials sector are expected to post double-digit profit growth with gains of 10.4% and 10.1%, respectively. Seven out of 11 sectors are expected to turn in year-over-year growth in the low single digits or worse.


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