Hope you are all doing well. Earnings season is well under way, the Dow and the S&P 500 posted their second weekly gains in a row while the NASDAQ finished slightly lower. We are now two weeks into earnings season and the proportion of S&P 500 companies that have beaten analysts’ bottom line expectations is at 75%. That beat rate on the surface seems encouraging but remember expectations are set pretty low. This quarter the expectation is for an earnings decline of -7.0%. With 18% of the S&P having reported so far the blended earnings decline for the S&P 500 earnings is -9.0%. If that -9.0% number holds it will be the largest earnings decline reported by the index since the pandemic shutdown quarter, Q2 of 2020. Tony Bennett passed away this week. I have broken down this week’s update using a couple of his notable songs and lyrics.
Steppin’ Out With My Baby
The Dow has never felt quite so sunny. A tiny gain on Friday gave the index its 10th positive trading day in a row. It’s been 6 years since we have seen a positive streak of this length in the Dow. Solid quarterly earnings results from several components of the 30-stock index provided the key catalyst to extend the positive streak for the Dow. The index has risen about 4.5% overall over its 10-day run. As I predicted last week the breadth and leadership of this rally is shifting and broadening out more recently. The Dow’s out performance of late highlights that gains are now being made by cyclical sectors and investments, not just big tech.
Rags to Riches
To paraphrase the song the smaller banks pockets may be empty but this week’s rally has shareholders feeling like millionaires. Shares of several U.S. regional banks rallied after their quarterly earnings exceeded lowered expectations in the wake of recent bank failures and significant deposit outflows. The news this week was very encouraging. Many of the biggest regional banks reported that second-quarter deposits were stable. Some in fact reported that deposits were even higher than in the first quarter. As a result, a handful of banks saw their shares rise more than 10% for the week. I am not sure this sector is out of the woods yet, so I would not be buying this rally. Though, I think the doom and gloom scenario of a wave of bank failures, that some of the television pundits were predicting, is extraordinarily unlikely at this point.
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