IG Markets: Notes on Australian markets today

Kyle Rodda, Market Analyst, Australia

The day's key takeaways:

- ASX200 falls, following Wall Street soft lead, after Fed keeps interest rates on hold

- Fed flags some “uncertainties”, unsettling traders, but monetary policy remains pro-risk

- US earnings season hits its crescendo: upside surprises for the period slowly increase

- S&P500 earnings stand in contrast to slowing profits in broader corporate America

- Monetary policy drives mega-cap stock prices higher, as investors sift for profit growth

The run down:

US stocks edged lower last night, and the ASX, today, has followed suit. It was a choppy day’s trading for the S&P500, which found itself pushed-and-pulled by several unrelated market-themes. Arguably, the biggest event in the market last night was the US Fed’s interest rate decision. The Fed delivered as much as the market might have hoped. The board members voted unanimously to keep interest rates steady, and flagged that rates ought to remain at their accommodative levels into the future. Inflation pressures are still muted in the US economy, with the Fed seemingly comfortable with a small overshooting of its inflation target if it were to occur. Best of all: the Fed committed to extending its repo market operations thought until April, reassuring market participants that liquidity should stay amply supported into the near-term. The ultimate result was a slightly weaker USD, a reasonably considerable drop in US Treasury yields, and slightly greater odds of another Fed cut in 2020.

Initially, stocks liked what the Fed delivered, too. The S&P500 put in a quick run after it handed down its policy statement. But the move proved short-lived. By the looks of things, traders were a little unimpressed by the cautious tone struck by Fed Chair Jerome Powell in his post-decision press conference. In response to a question about the possible economic impacts of the coronavirus, Chair Powell stated that broadly speaking, though economic conditions are picking up, certain “uncertainties” to the growth outlook persist. It was a benign comment, but it was enough to push the S&P500 into the red by the end of Wall Street trade, probably as very short-term speculators used the notionally pessimistic language as an excuse to sell the market. All in all, though, for risk assets, investors, and maybe even main street, the first Fed meeting for 2020 was a constructive one. Policy will remain loose, and the Fed is showing no desire to rock the proverbial boat.

For stocks, corporate fundamentals are proving the anchoring point for market activity. US earnings season is right at its crescendo, and delivering some noteworthy results. After Apple’s beat yesterday, it was Tesla, Microsoft and Facebook’s turn to bask in the limelight. The first two companies put in a stellar performance. Tesla, reporting record revenues, a very robust EPS beat, and qualitative signs of increased vehicle production moving forwards, surged 14% in post market trade. And Microsoft, though not as impressive as Tesla’s results, did post record revenues for the quarter, topping the highest analyst estimate for that metric. On the flip side, Facebook was the major disappointment. It’s share price swan dived in aftermarket trading, even in light of stronger than expected revenue and EPS growth. Overall, corporate earnings have improved as the US reporting season has worn-on. The number of upside surprises has lifted to 70%, while expected earnings growth for the quarter has improved to -1.4%.

The co-incidence of the US Fed meeting, and the earnings releases of several of the US’s mega-cap companies, provides a nice opportunity to jump on the soapbox about economic policy, investment markets, and secular macroeconomic trends. It’s becoming abundantly apparent that there is a growing divergence between the US’s fundamental economic growth, and the profit growth delivered by the country’s largest companies. The reporting period has more-or-less highlighted this fact. The phenomenon can be best observed and contrasted in the continuing split between US corporate profit growth, and EPS growth across the S&P500. The former has been trending downwards since 2014, while the latter, while off its 2018/19 highs, is still moving higher, and is expected to pick-up in the years ahead. This is largely due to the huge growth of the tech sector, which has largely fuelled Wall Street’s remarkable ascent since the GFC, and, judging by its rich multiples, is expected to do so for some time into the future.