Surprised? Not much – big picture

“More than 71% of S&P 500 companies have finished reporting revenue and earnings for Q2-2021, with revenue and earnings surprises at their lowest levels since the pandemic recovery began. Revenue continued to beat consensus forecasts by 2.5%, and earnings beat estimates by 5.6%.” -Ed Yardeni

We enter the dog days of summer and the markets shut down from July for the best part of the year. There is some hope that the lows set in June will “bottom out” and markets may return to their previous bullish bias.

A lot of skepticism remains that it’s that simple: markets have seemingly already discounted a mild recession but nothing more serious; 2/10’s yield curve inverted a little more deeply than last time; The CPI comes out next week, giving a fresh indication of where inflation and what the Fed may do at their September meeting. If all goes well, perhaps all optimism is warranted.

And yet. . .

There are many ways this rally could come out. The biggest concern is corporate revenue and earnings. All things considered, they have held up rather well. It appears that investors are counting on earnings to stay strong even as the economy faces a brief, shallow recession.

Consider the Yardeni chart (top) that shows the earnings surprise: despite a variety of economic and geopolitical negatives, earnings have held up relatively well. (Revenue, too). And given that we’re only 3/4 of the way through the Q2 earnings season you know, the likelihood of more surprises tends to be low (big upside/downside surprises tend to be pre-announced).

My concern is not Q2 earnings, but Q3: As we’ve shown time and time again, consumers and businesses showed continued strength in the first half of the year. My concern is the impact of the aggressive FOMC tightening cycle. The dynamic impact of these changes was not felt in the first two quarters of the year. Persistently negative GDP prints were more a technical combination of inventory build trades, a stronger dollar and higher inflation than a real contraction in economic activity.

But that was before our two consecutive 75 basis rate hikes — we went from zero a year ago to 2.25-2.50% which was effectively zero before March this year. And that was before we ended Quantitative Easing (QE) and replaced it with Quantitative Tightening (QT).

September is when we get to see pre-announcements which are rather ugly. It is a bit too neat to expect an October lower revision because of the overtightening effect of the FOMC on corporate profits, but it is certainly a possibility.

I noticed near the low point in June that I “The contrarian in me is starting to get that itch to buy in here, but it’s not “gotcha get nothing” like 2020 or 2009.“I suspect that the potential for a great trading entry is somewhere in between. The end of Q2 or the beginning of Q3 are likely dates, depending on how things go.

In the meantime, the dog days of summer are here. Enjoy them while you can. . .

Source: Yardeni Research

in the past:
Signs of Softening (July 29, 2022)

Soft Landing RIP (July 25, 2022)

Why Recessions Matter to Investors (Jul 11, 2022)

Too late to sell, too early to buy… (Jun 16, 2022)

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