Almost 85% of the companies in the S&P 500 have reported results, with about 79% topping estimates. Bears are unimpressed with the earnings beats saying analysts had set a very low bar. Bears also point out that this will be the third quarter in a row that S&P 500 companies have reported declining earnings (down over -5%) and they likely face even further headwinds ahead amid tighter financial conditions and continued margin pressure.
Analyst expectations for Q3 2023 aren't strong, ranging from a decline of around -2% to a slight gain of under +1%.
While Wall Street insiders do mostly see a return to growth between +4% to +7% growth in Q4 of 2023, bears don't believe even the rosiest outlooks justify current stock valuations. The forward 12-month P/E ratio is 19.2, versus the 5-year average of 18.6 and the 10-year average of 17.4. Bulls point out that growth estimates have recently started moving up and expect a still-large pile of money is sitting on the sidelines that might come back into play sooner than later and help push the market even higher.
Most bulls see the recent pullback as "healthy" market consolidation following five straight months of gains for the Nasdaq and S&P 500, which are now up +32.9% and +16.6% year-to-date, respectively. The Dow is up nearly +6%.
They also view the pullback as a buying opportunity that could lure more investors back to stocks.
Earnings are scheduled today from BioNTech, KKR, Lucid, Palantir, and Tyson Foods.
On the economic front, investors today will be digesting Consumer Credit for June, something Wall Street has been monitoring more closely for signs that higher interest rates and tighter lending standards may be squeezing consumer spending. Credit growth in May slowed considerably, rising just over +$7 billion versus around +$20 billion the previous two months.
Investors are also closely watching credit card balances and rising delinquency rates which could indicate deteriorating consumer health. Auto loans now have a late-payment rate higher than pre-pandemic levels, though credit cards and other credit products are still below February 2020.
I should mention that the July Employment Report released on Friday showed a lower-than-expected gain of +187,000 jobs versus economist estimates for +200,000. However, the unemployment rate ticked down for a third month in a row to 3.5% from 3.6% in June while average hourly wage gains held steady at +4.4% year-over-year.
Bottom line, the labor market remains extremely tight with no signs that wage growth is slowing down, a situation that will not be viewed as ideal by the Federal Reserve.
There is one more jobs report for August (due out September 1) before the Fed's next meeting on September 19-20.
Bottom line, "wage growth" remains too hot and the Fed has stated several times that they worry this could keep inflation hotter than they would like to see. Which means the Fed could again raise rates or be tempted to keep them higher for longer is they don't start to see greater weakness in the Employment data.
Later this week, investor will get July inflation updates via the highly anticipated Consumer Price Index on Thursday, followed by the Producer Price Index on Friday. Staying cautiously optimistic but worried we could see a little more back-and-fill type price action before the next leg higher.
US Home Prices Remain Strong: Home prices are on a tear again across much of the nation after falling for most of last year. Home prices in June hit record highs in 60% of US markets, according to a new report from Black Knight, set to be released today. Its national home price index hit a new high in June, up +0.8% from June of last year, a stronger annual growth rate than May. Total equity hit over +$16 trillion with tappable equity, which is the amount most lenders will allow you to take out while still leaving 20% equity in the home, rising to $10.5 trillion, just 4% off its 2022 peak. Per homeowner, that is roughly $200,000 in cash sitting in the house, ready for the taking. As a result, negative equity, or so-called underwater borrowers, are a lot fewer in today’s market. Just 344,000 homeowners across the US currently owe more on their homes than the properties are worth. Source CNBC
Has E-Commerce Peaked? Three years ago, as lockdowns forced consumers to move much of their spending online, a golden age for e-commerce appeared to be dawning. Optimistic investors, convinced that shoppers would keep buying on the internet, lifted valuations of e-merchants to frothy heights. Retailers old and new raced to expand delivery networks. Today those heady days look like a distant memory. On August 3rd Amazon, the world’s largest online retailer, reported 11% year-on-year growth for the second quarter of the year, excluding its cloud-computing division. Yet it was a fraction of the 42% sales growth that Amazon reported for the same quarter in 2020, and slower than the giant’s pre-pandemic trend. The same day Wayfair, an online purveyor of furniture that surged amid covid-19, reported its ninth consecutive quarter of declining sales. A slowing economy is only partly to blame for the reversal. After spiking in early 2020, the online share of retail spending in America has remained stagnant at around 15%, roughly what it would have been had the pre-pandemic trend continued uninterrupted. Source The Economist
Big Oil’s Talent Crisis: High Salaries Are No Longer Enough: Even as oil-and-gas companies post record profits, the industry is facing a worsening talent drought. At U.S. colleges, the pool of new entrants for petroleum-engineering programs has shrunk to its smallest size since before the fracking boom began more than a decade ago. European universities, which have historically provided many of the engineers for companies with operations across the Middle East and Asia, are seeing similar trends. Students and high-skilled young workers are concerned about the industry’s role in climate change, as well as long-term job security given that global economies are transitioning away from fossil fuels to other energy sources, according to executives, analysts and professors. The trend is a stark departure from previous cycles, when the industry’s workforce ebbed and flowed with the rise and fall of oil prices. The number of undergraduates pursuing petroleum engineering has dropped -75% since 2014, according to Lloyd Heinze, a Texas Tech University professor. It is a trend that has continued even as other recent studies have shown that the average graduate earns +40% more than a peer with a computer science degree. Source WSJ
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Employers Reluctant to Let Workers Go Trim Hours Instead: US employers in struggling sectors such as manufacturing are reducing hours rather than resorting to aggressive job cuts, with flashbacks to recent labor shortages that challenged so many companies. The average number of weekly hours for nonsupervisory workers in manufacturing slipped last month to 40.6, matching the lowest since the early days of the pandemic, the government’s jobs report showed Friday. The latest data available for the truck transportation industry show the fewest hours worked since 2020, while weekly hours at warehouses stand at a one-year low. Manufacturing and transportation are among industries struggling for traction as many consumers change their spending patterns from goods back to services. US factory activity has now contracted for nine months and freight activity has slowed. Despite recent woes, goods-focused companies have gone only so far in trimming payrolls. While manufacturers and transportation firms alike have largely scaled back hiring plans since last year, employment growth in those industries has merely stagnated. Source Fortune
Ray Dalio Says "Great Wealth Transfer" Explains Economy's Resilience: Interest rates are at a 22-year high as the Federal Reserve continues to battle inflation, and recession fears remain — but the US economy is holding in there. Exactly why the economy remains resilient is open to debate — but the veteran investor Ray Dalio has come up with an explanation. The Bridgewater Associates founder wrote a lengthy LinkedIn post last week outlining what he called the "Great Wealth Transfer." "There was a big government-engineered shift in wealth from 1) the public sector (the central government and central bank) and 2) holders of government bonds to 3) the private sector (i.e., households and businesses)," he wrote. "This made the private sector relatively insensitive to the Fed's very rapid tightening to a more normal monetary policy. As a result of this coordinated government maneuver, the household sector's balance sheets and income statements are in good shape, while the government's are in bad shape." In other words, the federal government took on a lot more debt and the central bank printed far more money — causing the US balance sheet to deteriorate and contributing to inflation while benefiting the private sector. Source Insider
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Today is "Purple Heart" Day...
The Purple Heart, or the Badge of Military Merit created by George Washington, was intended to signify “not only instances of unusual gallantry in battle, but also extraordinary fidelity and essential service in any way.” Over 200 years later, we still use this powerful symbol of gallantry to honor the bravest of servicemen and women who stand tall on the frontlines of combat-ready to defend freedom, liberty, and justice for all around the world as well as the United States of America. Thanks to Army Gen. Douglas MacArthur, the Purple Heart officially received its modern-day look and name in 1932. The revived medal was designated primarily as a combat decoration, recognizing commendable action as well as those wounded or killed in combat. It’s the oldest military award still presented to American service members.
Without just a few brave men and women our nation and our freedoms could look much different. Those split-seconds and moments in time that could have gone either way if men or women would have paused are crazy to think about. We're all forever grateful!
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