Stocks Waver With Earnings Expectations at Record: Markets Wrap

(Bloomberg) — Stocks wavered as traders awaited the start of the corporate earnings season while keeping a close eye on the US presidential race and clues regarding the Federal Reserve’s next steps.

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If the S&P 500 finishes higher, it will be its 35th record this year. Some of the largest US banks will kick off the second-quarter reporting season Friday, and analysts’ upgrades to profit estimates have outnumbered downgrades, according to a Citi index. At the same time, expectations for 12-month forward earnings stand at an all-time high, data compiled by Bloomberg show.

John Stoltzfus at Oppenheimer Asset Management said a robust earnings outlook and a resilient economy could support even higher valuations. He raised his year-end target for the S&P 500 to 5,900 points, which implies a 6% gain from the previous close.

“S&P 500 earnings results over the most recent three quarterly reporting seasons and economic data that has provided evidence of resilience underpinned by the Fed’s mandate-sensitive monetary policy remains at the core of our bullish outlook for stocks,” he noted.

The S&P 500 hovered near 5,570. Chipmakers led gains, with Nvidia Corp. rallying after UBS Group AG raised its target, citing “exceedingly robust” demand. Taiwan Semiconductor Manufacturing Co. briefly surpassed $1 trillion in market capitalization. The Russell 2000 index of small caps added 1%. Treasury 10-year yields was little changed at 4.28%.

The lack of any clear winner in the French elections is being viewed with some relief by investors, who speculated there’s unlikely to be any major policy changes while the government is deadlocked. Meantime, President Joe Biden pledged to fellow Democrats he will remain in the 2024 presidential race.

“S&P 500 earnings growth will likely continue for the next year at a respectable pace,” said Nicholas Colas at DataTrek. “Moreover, those improvements should be broad-based rather than in just a few tech-heavy sectors. All this adds up to continued strength in US large caps.”

US stocks are heading for a painful two-week stretch starting in early August as returns can be muted due to big outflows from passive investors and any disappointment in corporate earnings can force systematic funds to sell stocks, according to Goldman Sachs Group Inc.’s Scott Rubner.

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He noted that the bar for second-quarter earnings is no longer a tailwind as high expectations have been priced in. With positioning from systematic funds elevated, any spike in volatility and misses from “highly owned market capitalization weights may force non-fundamental sellers to reduce risk,” Rubner said.

For the past two years, a small cohort of companies have contributed to the bulk of the gauge’s return: The S&P 500 has gained roughly 55% since the lows of October 2022 — but 58% of that advance has come from just the top 10 stocks in the benchmark, according to data compiled by Bloomberg.

Meantime, Jerome Powell will face pressure this week from lawmakers growing impatient for the Fed to cut rates and others who are unhappy with its latest plan to boost capital requirements for Wall Street lenders. The Fed chair heads to Capitol Hill on Tuesday and Wednesday for his semiannual testimony.

Aside from Powell’s testimony, June consumer price index data released on Thursday will be a highlight for investors this week. The so-called core CPI, which excludes food and energy costs and is seen as a better measure of underlying inflation, is expected to show the smallest back-to-back gains since August, a pace more palatable for Fed officials.

“While the CPI release will be key, we will be looking for signs from Powell that the Fed is edging closer to a decision to cash in its chips and move in September provided ongoing inflation news broadly confirms that the run-rate has stepped back down,” said Krishna Guha at Evercore.

If US inflation moderates without collateral damage to the economy, the resulting Fed easing cycle could be a tailwind for risk assets, acoording to Jason Pride and Michael Reynolds at Glenmede.

“Synchronized global easing cycles have historically been a bullish signal for equities in the short-to-medium term,” they noted.

The S&P 500 has posted forward returns of 9.9% in the 12 months immediately following periods of 40–60% of global central banks easing policy, Glenmede said. That number increases to 18.7% in the 80–100% tranche — suggesting that equities could benefit if more central banks hop on the easing bandwagon.

Corporate Highlights:

• Exxon Mobil Corp. expects refining profits to drop due to lower margins across the industry, reducing earnings estimates for the second quarter.

• Eli Lilly & Co. agreed to buy U.S. gut-drug maker Morphic Holding Inc. for about $3.2 billion, plowing some of the proceeds from obesity blockbuster Zepbound into its experimental pipeline.

• Devon Energy Corp. agreed to acquire the Williston Basin business of Grayson Mill Energy for $5 billion as consolidation continues in the US oil patch.

• Paramount Global agreed to merge with Skydance Media in a deal that hands control of the storied Hollywood studio to producer David Ellison, ending one of the industry’s most dramatic acquisitions.

• Lucid Group Inc. beat expectations for quarterly production and deliveries, sending the automaker’s shares higher as it shook off concerns about a slowdown in the electric-vehicle market.

• Microsoft Corp. told employees in China that starting in September they’ll only be able to use iPhones for work, effectively cutting off Android-powered devices from the workplace.

• Boeing Co. will plead guilty to criminal conspiracy in connection with two fatal crashes of its 737 Max jetliner, an agreement that disgraces the storied US planemaker as a felon but avoids a bruising courtroom confrontation as it tries to rebound from multiple crises.

Key events this week:

• China aggregate financing, money supply, new yuan loans, Tuesday

• Jerome Powell delivers the Federal Reserve’s semi-annual testimony to the Senate Banking Committee, Tuesday

• US Treasury Secretary Janet Yellen testifies to the House Financial Services Committee, Tuesday

• Fed’s Michael Barr and Michelle Bowman speak, Tuesday

• China PPI, CPI, Wednesday

• Jerome Powell testifies to the House Financial Services Committee, Wednesday

• Fed’s Austan Goolsbee, Michelle Bowman and Lisa Cook speak, Wednesday

• US CPI, initial jobless claims, Thursday

• Fed’s Raphael Bostic and Alberto Musalem speak, Thursday

• China trade, Friday

• University of Michigan consumer sentiment, US PPI, Friday

• Citigroup, JPMorgan and Wells Fargo report earnings, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.1% as of 10:32 a.m. New York time

• The Nasdaq 100 was little changed

• The Dow Jones Industrial Average rose 0.4%

• The Stoxx Europe 600 rose 0.1%

• The MSCI World Index was little changed

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro was little changed at $1.0836

• The British pound rose 0.2% to $1.2839

• The Japanese yen rose 0.1% to 160.57 per dollar

Cryptocurrencies

• Bitcoin fell 3.2% to $55,437.87

• Ether fell 2% to $2,938.2

Bonds

• The yield on 10-year Treasuries was little changed at 4.28%

• Germany’s 10-year yield declined two basis points to 2.54%

• Britain’s 10-year yield declined two basis points to 4.11%

Commodities

• West Texas Intermediate crude fell 0.5% to $82.71 a barrel

• Spot gold fell 0.7% to $2,375.70 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Cecile Gutscher, Juliette Laffont, Catherine Bosley, Matthew Burgess, Vildana Hajric, Sagarika Jaisinghani and Alexandra Semenova.

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