US Earnings - Early, and a Mixed Picture

We certainly had a busy week, mixed with politics, central bankers, and de-risking.

Coming into the week, there was an assassination attempt on Former President Trump. This actually led to increased odds of his winning the presidential elections (now at about 66%).

President Biden made an announcement of his own - getting Covid, yet again. Nevertheless, he’s determined to return to the campaign trail next week. There was some chatter about VP Harris being a potential candidate if health issues prevent the President from running.

We also had the Republican National Convention, where Trump was confirmed as the party’s nominee and he chose Senator JD Vance as his VP nominee. The market seemed to like this announcement and the earlier part of the week was dominated by the Trump 2.0 trades - Higher Industrials, Small Caps, and Bitcoin. We questioned the small cap rally, earlier in the week on the MacroVisor Breakfast Bites and it wasn’t long before they showed their true colors.

We also mentioned July 17 as being an interim top for the market as we enter the window of weakness. This was also Vix expiration and right on cue, the market started selling off. It was also OpEx week, a time when the supportive flows can often get dicey.

On a technical basis, the Nasdaq is now closest to the 50-day moving average. Moving below this level, could see price action move a fair bit lower.

Goldman’s Prime Book tells us that this week we saw the largest notional net selling in US Single Stocks since March 2022. 9 of the 11 S&P 500 sectors were “(sans Consumer Disc and Comm Svcs), led by Info Tech, Health Care, Financials, and Energy.

Earnings Season - Early, and a Mixed Picture

Earnings season is seemingly off to a great start with blended YoY EPS growth of 9.7%, after 14% of the S&P 500 has reported. The blended growth takes what’s been reported and blends it with estimates for companies that have not reported as yet.

We got some major Large Cap earnings this week with more to come next week. I wanted to cover some of the lesser followed companies though and what they had to say about the economy.

PPG, a global supplier of paints, coatings, and specialty materials, delivered disappointing guidance.

• Global industrial activity remained subdued in the second quarter, and despite entering the peak buying season, the actual growth did not meet expectations.
• Sluggish global auto OEM production was another significant factor. The situation in the automotive sector, combined with other factors, can be seen as an indicator of weaker economic conditions but, the CEO didn’t think a recession was imminent.

We heard from Cintas, a company that provides uniforms, cleaning and safety supplies.

• The company delivered great results and the market took it positively. Cintas' results serve as a barometer for business confidence among small and medium-sized enterprises.
• High retention rates and robust new business suggest SMEs are maintaining or expanding their workforce and operational needs.
• Even though they talked about challenging economic conditions, it would seem that many small businesses are navigating the environment thus far.

We then heart from the major integrated trucking company, J.B. Hunt.

• They missed earnings for the 7th consecutive quarter, with negative revenue growth since 4Q22 due to weak demand. It’s no secret that goods demand has been retreating - we can see it in the inflation numbers.
• The truckload market suffered from unsustainable pricing and excess supply, significantly impacting performance.
• CEO Shelley Simpson noted significant economic challenges, with increased competition and ongoing cost pressures from long-term investments affecting margins and overall performance.

And finally, we heard from the biggest homebuilder in the US, D.R. Horton, who delivered a double beat and announced a $4B buyback program.

• Limited supply and favorable demographics continue to support housing demand despite high inflation and mortgage rates
• High interest rates have made home affordability a challenge, leading D.R. Horton to use incentives like mortgage rate buydowns and price adjustments
• Homebuyer demand remained strong during the spring, with D.R. Horton well-positioned with 42,600 homes in inventory and a $380,000 average selling price

What’s in store for next week?

A massive number of companies reporting. After Netflix and some of the industrials, we are seeing some profit taking ahead of earnings. Revenue growth for the Mag 6 is set to slow on a rate of change basis and according to GS, so is earnings.

Closing Thoughts - Hedging and De-risking

A few issues hit tech hard this week. Firstly, the announcement that there would be more restrictions on chips, particularly in China. Taiwan Semi’s earnings results managed to lift the sector a little bit, but we saw selling resume on Friday. Secondly, we saw the global outage on Friday because of a Crowstrike update that interfered with Microsoft-based computers. Finally, we also saw Netflix earnings, which seemingly failed to impress investors too much.

All in all, we’re seeing risk unwinding and some of the risk-off trades dominate now. We also have this window of weakness in the second two weeks of July and the first two weeks of August. Last year, we saw an extended period of this weakness into October.

We’re likely to start seeing hedges come on in portfolios. Something to think about!

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned.Full Disclaimer: https://www.macrovisor.com/c/disclaimer