United States Enters The Reporting Season, Would Negative Earnings’ Scenario Take ASX To All-Time High?

Investors get glued to their screens as the United States enters the reporting season with a number of Wall Street’s largest tech and financial companies set to release second quarter (Q2) results this week.

United States earnings guidance

The nation driving the global financial market signals negative earnings outlook that is likely to take the S&P 500 index’ earnings down 3% (Source: FactSet). The data present that 77%, 88 out of 114, of US companies have issued negative EPS guidance that marks the second highest number of S&P 500 companies issuing negative guidance since 2006.

Information Technology, Materials and Healthcare sectors have been recorded at the centre of the estimated earnings decline that led the total percentage of companies issuing negative EPS guidance above the 5-year average of 70%.

But is the United States ready to accept the possible letdown?

US Central Bank-Federal Reserve-has have been quite vocal about its intention to cut interest rates in July meeting. Even, last week, Federal Reserve Chair Jerome Powell was heard stating the possible rate cuts at congressional testimony, advising that the central bank has room to soften monetary policy given the fact that close ties between inflation and jobless rates have broken down.

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The optimism around the possible rate cut took Dow Jones to an all-time high above 27,000 points on Thursday.

Fed’s possible rate cuts seem to brace the United States from the shockwaves coming in the face of weak earnings that could hit the nation’s economy really hard. But how aggressively the Federal Reserve would ease monetary policy remains the main area of concern for investors.

If S&P 500 reports the estimated decline of 3% in Q2, it will be the largest year-over-year decline in earnings reported by the index since Q2 2016 (-3.2%) and will mark the two straight quarters of year-over-year declines in earnings since Q1 2016 and Q2 2016 (Source: FactSet).

Earnings, Labour Market driving Australia’s future

The loss in United States earnings coupled with the decline in US bond yield could weaken the greenback strength in the foreign exchange market globally. Given the scenario, the market is not too far to see the weak performance of US companies electrifying the other equity markets in the global landscape.

Australia is expected to stand among the top gainers. The market predicts that stocks listed on the Australian Securities Exchange could hit a new all-time high if negative earning of the United States and disappointing jobless data prompts Fed to cut rates in their upcoming meetings.

Equity Prices in Australia have lately been on the upward trajectory with a recent increase in all main sectors broadly following the international trend. As at 16 July 2019, ASX All Ordinaries is trading near to its peak, just 23.10 points below the all-time high of 6873.20 points set in 2007.

However, Australia’s central bank noted the increased expectation that major central banks would ease monetary policy given the ongoing subdued inflation and the trade-related downside risks to global growth.

Interestingly, Reserve Bank of Australia has already taken the lead in the policy change trend to push the economic growth, focused on the labour market and inflation to maintain it on track to return to a target inflation rate of 2-3 per cent. Having said that, Australia’s central bank has announced a rate cut of 25 basis points for a second month straight to a new record-low 1% in the minutes of its July 2 meeting.

The members believe that lower interest rates would assist in reducing spare capacity in the economy and making faster progress in reducing the unemployment rate.

To look at the current picture, we can see that job vacancies in Australia have declined 1.1% for the first time in three years during March-May quarter and unemployment increased to 5.2% in April, which stood unchanged in May 2019, as per the ABS data.

Labour Force’s data due on Thursday would now be a key indicator of the RBA’s next move. However, it was clearly stated by RBA in July meeting that ‘spare capacity is likely to remain in the labour market for some time’ and to achieve any further improvement in the labour market, wage growth needs to be increased materially. The given scenario signals the central bank’s intention to cut interest rates again ‘if needed’ in support of inflation, employment and wages growth.

On the front of the United States, the market concerns for a recession were recently seen settling down a bit after the Bureau of Labour Statistics released better than expected job data for June 2019. It showed that 224,000 jobs were created in the month of June, well above the market speculation of 160,000.

This rebound in US job data is closely being watched by economists to estimate how it might affect the Fed’s rate decision in July meeting, scheduled to start on 30 July.

Although the better than expected job data has added strength in consumer spending, analysts predict the negative earnings of US companies to follow in the third quarter. For the second half of 2019, analysts see a decline of 0.8% in earnings in the third quarter and mid-single-digit growth in earnings in the fourth quarter (Source: FactSet).

The negative outlook further reflects the downside risks from the trade and technology disputes between the United States and China. Australian investors currently await US Q2 earnings to see how US companies have been sailing through the uncertain market conditions, with the ongoing trade war at the centre of the economy.

About 15 of the 18 largest US banks are expected to report their second-quarter results this week. It would include Bank of America, Goldman Sachs, JPMorgan Chase, Citigroup, Wells Fargo and Morgan Stanley. The market, however, has no big hopes from the financial sectors due to the downgraded guidance mostly coming from this sector.

Investors are advised to keep a close track of US earnings as weak performance of US firms could substantially charge the bull-run on Australian Securities Exchange.


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