A fresh batch of earnings is right around the corner, as second quarter S&P 500 Index earnings season kicks off this week. With stocks near all-time highs, earnings need to come in strong to justify the recent strength. Additionally, the Federal Reserve (Fed) is poised to cut interest rates later this month for the first time since 2008, bringing with it many questions. This week on the LPL Market Signals Podcast, LPL strategists discuss these two important issues.
Earnings Season Preview
Numerous companies have already lowered guidance for second-quarter earnings, which is now expected to be down 3% year over year versus last year. Remember though, the eventual earnings numbers will likely come in higher, as analysts tend to set a lowered bar. In fact, for 41 consecutive quarters, earnings have topped the estimates. If this happens again, we see the potential for slightly positive earnings for the ninth consecutive quarter. The big wild card of course is tariffs, but we think much of those worries have already been priced into estimates. Looking under the surface though, the big concern is technology, which is expected to show earnings down as much as 15%. Considering technology is one of the largest components to the S&P 500, this is one group we will be watching quite closely.
Central Bank Check
Last week was a big week for future Federal Reserve (Fed) policy. It’s a near certainty that the Fed will cut rates July 31 at the next Federal Open Market Committee (FOMC) meeting, which would be the first cut since 2008. Fed Chairman Jerome Powell’s testimonies to Congress repeated the Fed’s view of a solid U.S. economy, but continued uncertainty from trade and the slowing global economy both have weighed on the domestic outlook. Additionally, the bond market has indicated that U.S. monetary policy is too tight for the uncertain trade environment. We found multiple times in the mid-1990s when the Fed cut rates with stocks near all-time highs, so it isn’t out of the ordinary for this combo to take place.
Chart Summary: Second quarter S&P 500 Index earnings are expected to be down roughly 3% year over year amid the downshift in U.S. and international economic growth, tariffs, and ongoing U.S.-China trade tensions. Third quarter earnings are expected to be slightly negative, but fourth quarter is the bright spot, expected to jump 6%.
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