Preview: US earnings season

The upcoming US reporting season shapes-up as the most significant markets have seen in several quarters.

Coming on the tail of Q4’s massive US stock market rout, during which several US stock indices flirted with a technical bear market, market participants will be searching this earnings season for information that either confirms the worst of that sell-off is over, or conversely that perhaps the bearish trend in US equity markets is set to continue.

In the bigger picture, concerns still reign about the prospects for global growth, especially considering the US-China trade war, and fears regarding how the US Federal Reserve may help or hinder a possible economic slowdown. The speakers dispatched from the Fed so far this year have gone to lengths to assure markets that they remain receptive to their concerns. However, Fed policymakers still appear out of step with market expectations, as traders price in the higher likelihood of a US recession.

The concerns have made their way to earnings forecasts. According to Bloomberg data, and using the benchmark S&P500 as the reference point, sell-side equity analysts are predicting that corporate earnings contracted by -1.3 per cent when compared to the previous quarter. More importantly, analysts are estimating futures earnings growth across the S&P500 for next quarter of 8.24 per cent, and 10.17 per cent for the year ahead – well down from last year’s growth rate of almost 20 per cent.

The market’s technical line-up interestingly leading into the reporting season, too. Once again using the S&P500 as the benchmark, that index sits very modestly below a key psychological-resistance level at 2600. Provided a bullish catalyst, a break beyond that mark opens the 50 per cent retracement of the market’s recent plunge – a point incidentally where the market twice found support during the recent sell-off and if breached represents confirmation that the recent short-term bearish trend is completed.

A failure to definitively break that level could open-up downside. Although a short-term sell-off would be no cause for concern given US equities’ recent rapid recovery, another tumble would open-up a possible challenge of the market’s low at 2350. At that point, the matter would become one of whether the bulls possess the will to prevent the market from registering a new low, or whether the rally experienced so-far in 2019 amounts to a mere bull trap, in a broader environment the bears still control.

Sentiment indicators have the market roughly balanced between the bulls and bears currently. According to IG’s data on trade flow, the market is roughly 60 per cent short on the S&P500, 55 per cent short on the Dow Jones, and 70 per cent short on the NASDAQ. The put/call ratio on the S&P500 has crept higher to 0.8, also indicating slightly higher bearishness. However, the VIX is well off its recent highs, and below the 20-level once again, conveying lower uncertainty and reduced fear in the market.

This reporting season will hold considerable weight over the outlook for corporate America in 2019. Furthermore, the results that are delivered to markets will contribute in a meaningful way to market participants’ expectations for US economic growth in the year ahead. The fundamental, macro, technical and sentimental factors are creating a particularly dynamic market environment, which may prove prone to surprises and subsequent volatility.

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