Like proverbial butterfly wind, earnings season is gaining strength. To date, approximately 45 companies in the S&P 500 have released their quarterly results with the number of scheduled announcements building in the days and weeks ahead.
So far, it’s been a solid start as eight out of 10 actual earnings results topped Wall Street forecasts, with 84% exceeding sales targets. If the current pace of year-over-year, bottom line growth holds, it will be the best quarter in more than a decade. However, one must consider the low bar due to COVID-19 lockdown late in the first quarter 2020.
Despite the fast start, there are a few concerning items for investors to monitor. First, only five companies upgraded their earnings/sales guidance. Although, none have reduced their projection. Still, we would like to see more companies pointing to better numbers than Wall Street expects.
And this is probably the most concerning item of all. The S&P 500 is currently trading at 22.5 times earnings, which is well above average (15.9) for the last decade. It hasn’t happened yet, but if Congress passes a corporate tax hike as President Biden wants, earnings for the S&P 500 could drop by 12%, according to analysis by Goldman Sachs. (1)
That likely means:
A: The S&P 500’s price to earnings ratio expands
B: Stock prices drop accordingly
C: Combination of A and B
Right now, Wall Street started the new week in the negative column with a little profit-taking following a strong week for stocks. Standalone, that’s not unusual or cause for concern. What is a little concerning is the timing of the downturn. The NASDAQ finished last week a few points away from its 52-week high.
Failing to make a new high might attract sellers, which is the way investors moved prices on Monday. If stocks don’t recover right away and follow The Doors’ advice to break on through to the other side, then a dip to the 50-day moving average is likely.
With all of our market measuring sticks posting bullish readings, we don’t foresee an extended period of selling. If prices continue to head lower, investors might consider buying the dip as the NASDAQ approaches its 50-day average of 13,510ish. On the other hand, if buyers can push the NASDAQ to a new 52-week high, a solid rally is highly likely.
Medical, Materials, and Mining stocks owned eight of the top 10 positions on our sector leaderboard as measured by weekly performance. Utilities and Cybersecurity were the two outliers. Most of the exchange-traded funds to make the list appear to be in the same position as the NASDAQ, teetering at the top of their charts. Two are in a longer-term downtrend and are worth observing for potential reversals, SPDR S&P Biotech ETF (XBI) and ALPS Medical Breakthroughs ETF (SBIO). If/when the pivots come, we’ll let you know.
With futures pointed lower and the indexes just as likely to drop as they are to go up, we’ll take a wait and see approach. We’d rather wait to buy the dip or for the indexes to break past resistance before committing to new names.
As you can see, the NASDAQ fell short of its recent high. Without a new high, the index likely retreats to its 50-day moving average.
1 – https://www.forbes.com/sites/sarahhansen/2020/07/13/bidens-tax-plan-could-cut-sp-500-earnings-by-12-goldman-sachs-warns/