Earnings season has begun in earnest and positive surprises are outweighing the negative surprises so far. Despite the mostly positive beats, US equity markets were down over 1% for the week. Forward earnings estimates came down earlier this year, tempering expectations of corporate growth and arousing suspicion of a slowing economy. This year has also faced growing uncertainty surrounding geo-political events and central banking policies. Positive earnings would be a partial salve against these negative developments.
The large tech giants will be closely watched as they have become the dominant return drivers for market indices. As of 6/30/2019, the top 10 companies in the S&P 500 by market cap comprise over 22% of the index. The tech giants (Microsoft, Apple, Amazon, Alphabet, Facebook) dominate this list. Microsoft has already reported stronger than expected earnings and the latter three will release their earnings this week. If the tech giants can follow Microsoft’s lead, it would help create a positive backdrop for equity performance going forward given tech’s concentrated effect on the market.
Fed Chair Powell last week appeared to support the case for a coming rate cut. Concerns of creeping inflation were downplayed. Powell posited that “inflation pressures remain muted” and that the personal consumption expenditures (PCE) index is estimated at 1.7% for the past year, short of the 2% target. NY Fed’s John Williams also piled on, stating “It’s better to take preventative measures” and restating Powell’s admission of a lower neutral interest rate. PCE may not be reflecting inflation, but other traditional inflation measures tell a conflicting tale; the price of gold has quietly increased over 16% in the past year.
Last week’s indicators were mixed overall. Retail sales saw a pickup, housing starts were lower than expected, and consumer sentiment held steady. Industrial production was flat but with a strong rebound in manufacturing after this year’s slowdown. The Beige Book release was largely a reiteration of June’s release: modest growth, strong labor markets, and stable inflation. The Fed Business Outlook Survey had a big reversal against its sluggish June figure, pointing to signs of very strong demand.
This week will continue filling in the picture of corporate health as more earnings are released. Only a few indicators of existing and new home sales, durable goods, and GDP reports are set to be released this week. Nascent headline risks that have the potential to blossom into large market movers are currently an escalation of US-Iranian tensions and re-emerging debt ceiling negotiations. Outstanding items waiting for closure include US-China trade negotiations, US-Mexico-Canada trade agreement ratification, and clarity of probable Brexit outcomes.
 Bloomberg, LLP
 Bloomberg, LLP
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