Finimize - 🤞 US earnings have something to prove

🔍 The focus this week: US Earnings Season

In case you haven’t noticed, we're in the midst of earnings season, with companies releasing their second-quarter updates one after another. And this one is particularly crucial: with US stock valuations sitting high, investors want to see results strong enough to sustain the market rally. So now that we’re nearly halfway through the season, it’s a good time to assess how Corporate America is performing.

As of the end of July, more than 40% of the companies in the S&P 500 have provided their latest updates. At first glance, the results seem like a mixed bag. On one hand, only 60% of them have reported actual revenues that were above estimates, below the 10-year average of 64%, according to FactSet. But on the other, 78% have reported better-than-predicted earnings-per-share (EPS) figures, and that’s above the 10-year average of 74%.

That disparity between revenue and earnings suggests that profit margins are improving, which indeed is the case. FactSet’s “blended” S&P 500 profit margin combines the actual results for companies that have reported with estimated numbers for those that have yet to release their results. And at the moment, last quarter’s figure sits at 12.1%. That’s higher than the previous quarter and the same period last year.

As far as profit growth is concerned, FactSet’s blended data suggests that firms’ EPS in the second quarter is 9.8% higher than the same time last year. If that number still holds at the end of the season, it would mark the fastest pace of earnings expansion since the end of 2021 and the fourth consecutive quarter of positive growth. That could be enough to convince investors that the S&P 500’s strong rally over the past two years might still have momentum. Although, they’re becoming increasingly harder to please: the market’s reaction to positive surprises has been lukewarm this season, while investors have been punishing negative results by more than normal.

📅 On the calendar

• Monday: Eurozone economic sentiment (August). Earnings: Palantir Technologies.
• Tuesday: Japan household spending (June), eurozone retail sales (June), US trade balance (June). Earnings: Uber, Caterpillar, Amgen, Airbnb, Rivian, Super Micro Computer.
• Wednesday: China trade balance (July). Earnings: Disney, Novo Nordisk, Shopify.
• Thursday: China loan growth (July). Earnings: Eli Lilly, Gilead Sciences.
• Friday: China inflation (July).

👀 What you might’ve missed last week

US

• The Federal Reserve (Fed) kept interest rates unchanged.

Europe

• The Bank of England (BoE) cut rates for the first time since 2020.
• Europe’s economy picked up by more than expected.
• But inflation in the bloc saw a surprise uptick.

Asia

• The Bank of Japan (BoJ) delivered its second rate hike of the year.

✍️ What does all this mean?

The Fed left its benchmark federal funds rate at a 23-year high for the eighth meeting in a row, holding it in a range of 5.25% to 5.5%. But the central bank seems increasingly confident that inflation is headed toward its 2% target, saying that it could start lowering interest rates as soon as its next meeting in September.

Britain received its first interest rate cut since the pandemic last week, following a tight five-to-four vote from the BoE. The central bank reduced the UK’s key interest rate by a quarter of a percentage point to 5%, after keeping it at a 16-year high for a year to bring down inflation. But that doesn’t guarantee more trims in the near future. In fact, the BoE didn’t indicate where rates might settle in the future or how quickly it would lower them. Instead, the central bank warned that cuts need to happen slowly and with caution.

The eurozone economy expanded by 0.3% last quarter from the one before, matching its pace from the start of the year and surpassing forecasts of 0.2%. See, even though Germany – the bloc’s biggest economy – posted an unexpected 0.1% drop, that was offset by solid performances from Spain, France, and Italy. That might be enough to reassure cautious investors, after some started doubting whether the region’s recent recovery still had legs.

Inflation data wasn’t quite as positive, though. A separate report out last week showed that annual inflation in the eurozone increased slightly to 2.6% in July from 2.5% the month before, defying economists’ expectations for a flat reading. Combine that unexpected jump with the hardy economic readings, which show the region is still resilient in the face of high borrowing costs, and the European Central Bank may see little reason to rush to cut rates again. But for now, traders are still widely expecting a quarter-point reduction to come out of the bank’s next meeting in September.

On the contrary, the BoJ raised its benchmark interest rate to “around 0.25%” – the highest level since December 2008 – from a previous range of 0% to 0.1%. Policymakers stopped short of committing to any further hikes this year, saying they’ll only consider them in response to evolving data and after assessing the impact of last week’s move. Finally, the central bank outlined plans to halve the amount of bonds it buys every month to around 3 trillion yen ($19.6 billion) by the first quarter of 2026.