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67% of companies have beaten on revenue, some seven percentage points above the five-year average, with those beating doing so by an average of 2.8%.
At an aggregate level, EPS from S&P500 companies has contracted by 16.5%, while sales have declined by 8.8% - but were we expecting anything else given the backdrop by which companies were operating in Q2? In fact, by the time we see the full suite of corporates report earnings, we’re likely to have seen a 42% drop in earnings, and a 10.1% decline in sales, representing the largest decline in earnings since Q4 2008.
One aspect we had identified in our prior earning note (https://pepperstone.com/en-au/market-analysis/us-earnings-season-q2/) was whether corporates would offer increased conviction to the notion that we’re on the cusp of an earnings upgrade cycle – a message being portrayed by the bullish moves in equities (notably cyclical stocks), copper, and crude. The fact expectations for Q3 GDP sit closer to +20% also re-enforces that view that earnings are only going to improve from here.
Intel aside, overall, the breadth of companies revising earnings higher has been quite bullish and as such aggregate S&P500 forward EPS assumptions have been lifted modestly. What also appears to be clear, in the early stages of reporting, is that we have seen companies make a genuine effort to lower the Cost of Goods Sold (COGS) and other expenses. The bulls will point to the rising scope for increased operating leverage, predominantly in cyclical stocks likely from next year.
Outlooks have not inspired
However, earnings revision has not been lifted to the extent that offers any real conviction that we’re yet to see the remnants of a v-shaped recovery in earnings that lowers valuations to more palatable levels in the quarter ahead. The lack of forward-guidance from CEO’s and CFO’s, while hardly unsurprising given the economic backdrop, simply results in traders focusing intently on the macro, with sentiment dictated by Fed liquidity dynamics, deteriorating US-China relations, US fiscal negotiations and the economic impact of renewed COVID concerns. Sky-high valuations mean that when we hear news, the bar to a positive move in price is high.
Concentration risk is key for equity index traders
What has also emerged as earnings season has rolled on has been the influence of an ever-greater concentration risk – that being, where a handful of high growth tech names have outperformed by such a margin that they now command incredibly high index weights – this is especially true in the NAS100 where Apple, Amazon and Google represent 30% of the index. The US500 is less pronounced, but we still find just five mega-cap names represent 22% of the US500 by index weight. This is where earnings from these high-flying names really do matter.
Super Thursday could be a volatility event
When you have such incredible concentrated risk, these leadership stocks can really knock the broader market, and even resonate into other asset classes. For example, if we look to Thursday we see Apple, Amazon and Google reporting – if they miss the mark, which seems unlikely given their pedigree, but we could see the NAS100 and US500 futures trade lower, which, could, in turn, push the USD, CHF and JPY higher in appreciation. This would then hit gold and copper. Obviously, the reverse is true if the market likes what they hear, even if valuations are extreme and the bar to a positive surprise is therefore high.
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