Dubai: As quarterly earnings season shifts into a higher gear, analysts and investors debate whether the big gains expected in corporate profits will boost stocks upward in the week ahead.
The second-quarter US earnings season kicked off with stronger-than-expected numbers from banks. However, the upbeat tone was not reflected in the movement of stocks last week.
Stocks slips despite positive earnings
In the US, stock indexes slipped for the week, with the S&P 500 down nearly 1 per cent and the Dow down about 0.5 per cent for the week. The Nasdaq was off by more than 1.9 per cent for the week.
Stocks have been falling even as earnings for the US S&P 500 companies are expected to be up more than 66 per cent for the quarter.
Diverse set of results ahead
A diverse group of companies are expected to report in the week ahead. Airlines, railroads, drug companies and tech are among the many industries reporting results in the week ahead in the US.
Netflix reports Tuesday, while Johnson & Johnson, Coca-Cola, and Verizon issue results on Wednesday. Intel and AT&T report Thursday. American Express and Honeywell release quarterly earnings Friday.
Peak quarter in the earnings cycle?
Analysts opine that investors are looking at this quarter as a peak quarter in the earnings cycle and they are probably going to be taking some profits because their expectations have been met and will not be exceeded in coming quarters.
Signs US economic growth has peaked have been boosting US technology stocks that led markets for much of the past decade so Netflix shares too have rallied of late, ahead of its results.
US bond yields scar investors
A drop in the bond yield is scaring investors overall, particularly equity investors. The falling 10-year US government bond yield has recently been viewed favorably because lower interest rates are positive for tech and growth stocks.
However, the yield is now getting attention for continuing to move lower, contrary to the reflation trade and defying forecasts for higher yields.
Crucial ECB meeting on Thursday
The European Central Bank (ECB) will face questions at its Thursday meeting on what its new 2 per cent inflation target might mean for policy, two weeks after revealing its closely anticipated strategy review.
Many developed economies are pondering tapering emergency stimulus but China has just added more money to its banking system and there’s an outside chance the benchmark loan prime rate (LPR) set by Chinese banks could be lowered as early as Tuesday.
European Q2 profits to double
Elsewhere, Europe’s results season is starting, and corporate earnings are expected to have more than doubled in the second quarter. Profits of the 600 biggest listed European companies are seen surging 110 per cent between April and June, according to Refinitiv I/B/E/S data.
“With stock markets in the US at record highs, and the dollar still looking strong, the focus remains on the US economic recovery and the outlook for inflation and central bank policy, with the latter in focus at the ECB meeting,” wrote chief market analyst Chris Beauchamp at UK-based trading platform IG Group.
Flux from new COVID-19 variant to cap gains
An upsurge in the Delta variant and forecasts for COVID-19 caseload in different parts of the world are stirring unease among investors. In the UK, bonds are benefiting from a rush to safety while European travel shares are down 8 per cent in the past month.
Friday’s July economic data releases may reflect the impact of rising infections on activity in Britain. Israel and Holland backtracked on reopening plans and Germany retained curbs until vaccinations rise.
