Three out of four may not be good enough The S&P 500 is down 7% from its 52-week low three weeks ago, and last week was up three out of four days. Some sectors are in modest uptrend: Healthcare is up strongly, and even Ttech and media services are posting modest gains. Cathie Wood’s Ark Innovation Fund (ARKK) closed Friday at a two-month high. The commodities sectors (metals/mining and energy) are underperforming, but most investors seem happy about that, as they have become a medium for inflation. The lower oil falls, the lower inflationary pressures will be, the sooner the Fed will back off from aggressive rate hikes. So why are many investors not excited about this rally? It seems like investors have had a mental breakdown all too often trying to make a bottom, so the recent rally hasn’t been met with a wave of buyer enthusiasm. Lowry, the nation’s oldest technical analysis service, epitomizes the market reaction. The company wrote in a note to clients over the weekend: “While the current rally appears to be taking place, so far it has not done much to confirm it is more than just a reaction to the market. with oversold conditions or to improve the long-term outlook of the market,” the company wrote in a note to clients over the weekend. note that while selling (supply) pressure has eased, there is only a “small improvement” in key buying (demand) measures such as momentum and breadth. The company has a position: The NYSE Composite Index, a market capitalization-weighted index of all stocks on the NYSE, is up about 4% since the June 17 week low, but the line The NYSE rise/fall remains near the 52-week low, suggesting that the average stock has rallied slightly over the past month. At least earnings estimates are starting to fall, I’ve been complaining for months that most of the roughly 19% drop in the S&P 500 this year is due to multiple compressions (lower P/E ratios), rather than estimating falling earnings, which has remained remarkably stable (analysts are still projecting earnings growth of around 10% for 2022 and another 9% in 2023). Estimates for the second quarter are finally down. Earnings season kicks off Thursday with the JPMorgan Chase report, as always. Second-quarter profits are expected to grow 5.7% year-on-year, but that’s mainly due to strong gains in oil company profits. According to Refinitiv, excluding the energy sector, earnings would fall by 3%. Even that 5.7% would be the slowest profit growth since Q4 2020. Bottom line: huge profits from energy companies are distorting the S&P earnings picture. Outside of the energy sector, estimated declines were fairly common: 9 out of 11 S&P sectors posted downward revisions to Q2 estimates, Refinitiv noted over the weekend. Still, the 5.7% earnings growth is a pretty low level to beat. It is the lack of clarity on inflation and the strength of the economy that will matter for the Q3 and Q4 estimates. Goldman Sachs’ David Kostin said: this time, but we think cautious comments will prompt future cuts in estimates,” said David Kostin of Goldman Sachs. Even before earnings season began, there was a higher number of companies with negative direction. John Butters at FactSet noted over the weekend that 71 companies issued negative EPS guidance for Q2, the highest number since Q4 2019, when 73 companies issued negative guidance.
