Earnings season accelerates during the next three days as over 90 S & P 500 companies are scheduled to post results. For the period, profits are expected to fall about 5%, the fifth consecutive decline and the longest stretch since 2009.
Many are writing the averages are approaching 2000 bubble valuations. I share this view about the indices but not for the typical stock. As discussed many times, the averages have been co-opted by high frequency trading and passive ETFs where the underlying premise is based upon capitalization, hence inferring the big will continue to get bigger and the small smaller.
The typical stock has grossly underperformed since 2011 with some studies suggesting this underperformance commenced in 2006.
From February lows to the end of June a transition appeared to be at hand where the typical stock outperformed as compared to mega capitalized momentum growth. Since Brexit, it has been the return of momentum growth amplified by the utilities and telcos.
The reason…central bank stimulus and low interest rates forever. I rhetorically ask what will be results if large cap growth misses on the dumbed down earnings projections and interest rates move higher because of stronger than expected inflationary pressures, the result of extremely low housing inventories amplified by rising PPI pressures?
Some have opined markets require a capitulation. Could I suggest mega capitalized momentum growth and utilities capitulated on the upside over the last three weeks? Could I then suggest there will be a continued rotation in the lesser owned securities that may benefit from higher interest rates, the result of greater economic activity as was the case in 2003-05?
All must remember it is never different. There are just different people.
There is little I can write about yesterday’s market action. Treasuries fell nominally on economic optimism, the dollar rose and crude slipped.
Last night the foreign markets were down. London was down 0.21%, Paris down 0.84% and Frankfurt down 1.05%. China was up 0.32%, Japan up 1.37%and Hang Sang down 0.60%.
The Dow should open nominally lower ahead of a busy earnings day, releases that include Microsoft, Goldman and various other large cap names. Netflix missed and the stock is down over 14% premarket. The 10-year is up 8/32 to yield 1.55%.