Quick Bite – US Reporting Season Delivers the Goods
Weak jobs data and President Trump’s revamped tariff plan have been unsettling markets over recent sessions. Yet despite that, the market edged higher, convinced that the Federal Reserve will cut interest rates to jump-start economic growth. And most importantly, the Q2 earnings reporting season has delivered better than expected results – if not justifying sky high valuations, then at least providing ongoing support.
US monthly job growth slowed to a lower-than-expected 73,000 in July. Large downward revisions to previous months’ job totals suggested that the labour market hasn’t been as resilient as investors had hoped in the face of Trump’s tariff onslaught, and undercutting a narrative that had propelled stocks to new heights in recent weeks.
Adding to the uncertainty facing investors, Trump fired the top Bureau of Labor Statistics official, asserting without evidence that the government’s jobs numbers have been manipulated for political purposes. That is not a good look.
Wall Street’s fear gauge saw its largest percentage increase since early April as the market jolted out of its recent tranquil period. The CBOE Volatility Index, the VIX, which uses options to measure short-term expectations for how volatile the S&P 500 will be, was up. Seasonality suggests the VIX will continue to rise.
Source: Topdown Charts
And yet, the market continues to rise. The US reporting season has been the platform upon which the market stands, and it has delivered. In company updates, we observed the following:
- S&P 500 Companies are no longer concerned about recession.
- Q2 earnings season saw a surge in big beats.
- Tech stock earnings are still rising strongly.
- Tech sector profit margins are at cyclical and secular highs.
- Strong earnings helped drive valuations to extremely expensive levels.
There has been a collapse in “recession” mentions in the latest round of earnings calls. Maybe it is a sentiment signal, or maybe it is a sign that things are ticking along OK and that fears of the US economy hitting “stall speed” are overblown.
Source: FactSet
Reporting season delivered better than expected results. Some 63% of the S&P 500 beat their consensus earnings estimate by at least 1 standard deviation.
Source: Goldman Sachs
Interestingly, companies who missed their earnings estimates are getting punished notably, which is a good sign suggesting that the market remains rational.
Source: Charles Schwab, KR Gordon
And as we have written about so many times over the last year, tech earnings have been sensational – and continue to be so.
Source: Evans & Partners
Overall, the bull market continues, seemingly unbothered, and climbing the wall of doubt. Yet the tendency for higher volatility around this time of the year and the likelihood for political/policy surprises means we should not get complacent. And even as the clearly good earnings data says maybe expensive valuations are somewhat justified, there is the rising risk that investors are over-paying for stocks and should not get caught up in the fear of missing out. It is never a bad time to take a hard look at your asset allocation and your portfolio and ensure that it remains fit for purpose. A well-credentialed Clime adviser can help.
