- SPY finished up nearly 2% last week.
- Earnings season tops out this week with mega tech.
- Momentum slowed toward the end of last week.
The bear market rally looks to have stalled as all attention turns to earnings this week. This is probably the biggest earnings week of the season, and so it is no surprise some risk was taken off the table ahead of it. When you add in the Fed meeting, it makes for a nervous week ahead for investors and a make-or-break scenario for the bull or bear argument.
Geopolitical tensions are back on the watchlist this morning as China and the US haggle over House Speaker Nancy Pelosi’s visit to Taiwan. Also of note naturally were reports of Russian missiles striking the Ukrainian port of Odesa, just as it appeared a deal was done to open the port to food shipments. The rally on Friday has of course stalled as PMI data was understandably poor and set the scene for this week’s GDP data. The Atlanta Fed tracker has been negative for some weeks now, so it may be that the US is in a recession after all. Recessions are commonly defined as two consecutive quarters of negative GDP growth.
The rally was likely to come under pressure anyway as this week is just too big to hold large positions. We have earnings from Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Meta Platforms (META), Amazon (AMZN), as well as most of the big oil companies. With the Fed meeting before its summer hiatus, positions were always likely to be cut, especially as liquidity remains terrible.
Earnings season is likely the next headwind for equities as neatly explained by the excellent Douglas Orr and Mr. Blonde.
SP500 down to 16X Forward earnings is cheaper but not cheap
– yes it’s now below the “Taper Ave” of 16.5X
– but EPS downgrades are very likely sizable for 3-6mths
– previous downgrade periods saw 15X/13X in ’15/’12 respectively
=> EPS downgrades & deratings likely = headwinds pic.twitter.com/bywvdEF47u
— Douglas Orr, CFA (@EquitOrr) July 25, 2022
a first, early, look at 2Q reporting season. so far i find it subpar…but on par with what i was expecting this year. negative revisions have broadened out and recent data (PMIs) suggest more paper cuts to come. https://t.co/zyB0YAU5AA
— MrBlonde (@MrBlonde_macro) July 25, 2022
This ties in with our own view of 2023 forward earnings estimates coming down from $250 to about $225. Adding in a P/E reduction to the S&P 500 though could make things get really nasty and that is even with the Fed pivot priced in.
On a trailing basis, the current multiple for the S&P 500 looks more appealing, but note that earnings are coming down from a record level. Speaking of the much anticipated Fed pivot, fixed income and money markets are now growing increasingly doveish and are pricing in the first Fed rate cut in early 2023. That seems a bit too early in our view and means fixed income markets are actually buying the “transitory” line. With so much debt, the US needs to inflate its way out of it.
SPY forecast: We have to close that gap right?
We just cannot seem to quite fill the gap to $401, and this week is quite significant on that front. Perhaps some early good earnings news might get us there. $415 is the extended target on a break of $401.
SPY chart, daily