Earnings season kicked-off on Tuesday with concerns over the lingering trade dispute between the United States and its trading partners in China and the European Union, taking a backseat, at least temporarily.
According to FactSet, S&P 500 second-quarter earnings are expected to grow by 20 percent. This would put them in a position to challenge the 24 percent jump reported during the first calendar quarter.
On Monday, the first day back from the extended Independence Day holiday, the blue chip Dow Jones Industrial Average posted a more than 300 point gain, mostly on the back of a strong financial sector, led by bank stocks.
It’s fitting that the banks finished the strongest because they benefit the most from a rising interest rate environment.
Today’s price action is being drive early by the results of more than 20 companies in the S&P 500 Index. The surprise of the day so far has been the results of PepsiCo. The soft drink and snacks manufacturer posted better-than-expected earnings, sending its shares higher by more than 2 percent. PepsiCo also provided positive guidance, saying it expects “substantially higher” earnings growth for fiscal fourth quarter.
While Pepsi came out hot right from the box this morning, other companies should be overlooked. According to The Earnings Scout CEO Nick Raich, 86 percent of the companies that have already reported exceeded their quarterly earnings expectations, posting 24.08 percent year-over-year growth.
Raich said, “Those are phenomenal numbers, but as we said they do not matter for current stock prices.” “This is why we are looking at the changes in earnings estimates after companies report and comparing them to prior periods to determine if the underlying trend in profit expectations can stay on an improving path.”
This is a very important point because earnings actually represent stale data. They represent the earnings from last quarter. The third and fourth quarter results will be the first during the period of full tariffs from the U.S. on Chinese goods and the retaliatory tariffs on U.S. goods from China. They will tell the actual story about the impact of the tariffs on company earnings.
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So at this time, investors should be looking beyond last quarter earnings and at any guidance from companies that mention the impact of the tariffs. It is possible that the market may not have fully priced in the possibility of a full-blown trade war just yet.
We do know from the way the three major indexes have performed that there have been asset allocation plays going on in the market. We also know that the weightings of the indexes have had a major influence on their performances so far this year.
The NASDAQ Composite, for example, faces little exposure to the tariffs, so it is up substantially this year and threatening a new all-time high this morning. The Dow Jones Industrial Average, however, is being weighed down by several stocks that face exposure from tariffs. The Dow is trading barely higher this year.
If the market begins to fully price in the impact of the tariffs then the Dow is likely to turn negative for the year, followed closely by the S&P 500 Index. Investors shouldn’t wait for third or fourth quarter earnings to tell them to bailout of certain stocks. They should be watching the future guidance during this current earnings season.