Investors no more surprised by earnings surprises

April 24, 2018 08:21 AM

Wall Street ended mixed on Monday as tech stocks continued to lead the major indices. The S&P 500 finished flat at 2,670, with the 1.07% gain in materials offset by the 0.43% decline in the tech sector. The Dow Jones Industrial Average fell for a fourth straight day as the heavyweight Goldman Sachs declined 2.1%, while the Nasdaq was in the red for the third consecutive day.

So far, more than 80% of S&P 500 companies reporting actual results managed to beat earnings expectations; if this trend continues, it will be one of the best earning seasons ever. However, with markets not rewarding earning beats, the risk of a steep correction is high. When investors are no longer moved by positive surprises, it’s either because this positivity has been already priced in, or they believe the economy is due for a slowdown and will thus drag earnings in future quarters.

Previously, a rise in oil prices used to motivate investors as it indicated more demand and growth. Now, it’s becoming a source of concern, with prices hovering near a three-year high of $75. Investors are likely to question the implications of higher commodity prices on inflation and the wider economy.

U.S. 10-year yields will also be monitored closely this week, as they were less than 0.3 basis points from breaking the 3% benchmark yesterday. The 3% by itself is just a psychological level and not a significant threat, but if a break above leads to further selling in Treasury bonds, that’s going to be a serious warning signal for equity bulls. With a current world running on A.I and algorithms, a selloff may look ugly.

It was a steady trading session in currency markets early Tuesday. The dollar, which was influenced by the move in yields, paused after rallying over the past five trading days. After the correlation between interest rate differentials and currencies has been broken over the past couple of months, it appears to be working again. With the Fed continuing to be the most aggressive central bank, rate differentials are likely to widen further, thus providing a further boost to the USD. The dollar also benefited from easing geopolitical tensions and trade concerns. Unless President Trump surprises us with a new Tweet, we may see further greenback appreciation.

The economic calendar is relatively quiet today, but I’ll be interested in the German ifo Business Climate Index. The German Services PMI rose to 54.1 this month from 53.9 in March, ending two straight falls in business activity. The Manufacturing PMI fell by 0.1 to 58.1, however, this was still better than the anticipated 57.5. The improved business activity may lead to a positive surprise in the ifo, however, due to changes in the calculation methodology, the number may vary widely from forecasts.   

About the Author

Hussein Sayed is chief market strategist at FXTM.