Corporate results in the US have been dropping. Earning expectations for the third and fourth quarters have been adjusted. On the positive side, the strong US labor market and GDP growth seem to have helped the economy avoid a recession.
S&P 500 Second-Quarter Earnings in Focus
The North American and European stock markets both experience bearish corrections at the start of August.
The remarkable success of the North American stock indices over the course of the year has not been indicative of how company earnings have changed during the past two quarters.
During this time, corporate profits have been declining. Stock analysts predict that the S&P 500 businesses will report second-quarter results that are down around 7% from the prior year. That is the third straight quarter of dropping earnings and the largest quarterly earnings decline for the index since the second quarter of 2020.
Earning Expectations for the Next Two Quarters Have Been Adjusted
The third and fourth quarter earnings forecasts have also been reduced. The current projections only show gains of approximately 0.2% and 7.5%, when experts had anticipated earnings to increase by about 5% in the third quarter and nearly 10% in the fourth.
This being said, the development of corporate earnings and that of the stock markets clearly differ from one another.
A Strong US Labour Market and GPD Seem to Have Helped Avoid a Recession
On a positive note, it is noteworthy to recognize the favourable development of the economy. The recently released macro data demonstrate a healthy labor market and GDP growth rates, which are far from the rates needed to reflect the long-anticipated recession.
Interest rates, however, have hit a cap that will eventually have a detrimental impact on the economy, even though they are almost at the end of their rise.
The North American indices started off yesterday in the red, notably the Russell2000, which is comprised of small-cap businesses and down more than 1% at the halfway point of the day. The Russell2000 is also beginning to technically display indicators of fragility, including bearish divergences on the daily RSI.
Will the ECB Stop Raising Rates?
Following the release of Purchasing Manger’s Index (PMI) data for the Eurozone and its member countries, European stock markets similarly underperformed. Emphasis was placed on the result for Germany, where the manufacturing PMI fell to levels not seen before the crisis.
With these economic indicators pointing to a severe recession in nations with as much economic significance as Germany, the European Central Bank (ECB) will hardly be able to keep hiking interest rates.
As a result, the Euro is still under downward pressure and the EUR/USD pair approached the 1.0950 level yesterday.
USA200 monthly trading chart August 2, 2023. Sources: Bloomberg, Reuters
Key Takeaways
- Corporate profits have been falling over the last two quarters.
- Earning expectations for the third and fourth quarters have also been lowered.
- Macro data shows a strong US labor market and GDP growth.
- North American indices were off to a rough start yesterday.
- European stock markets did not perform well after the release of PMI data.
- EUR/USD pair reached the 1.0950 level yesterday.
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