Inside Markets — Earnings Season

The first week of earnings season is always dominated by results from banks and Financials. We covered this yesterday but it’s worth repeating. The Financials sector was expected to generate +4.3% YoY earnings growth this quarter that would put it 7th out of 11 sectors in terms of contribution to SPX earnings growth. Instead, the Financials sector has delivered earnings growth of +14.4% with 22 out of 23 constituent members beating consensus estimates. But Q2 earnings season is beginning to ramp with the SPX trading at/near highs. The equity rally broadened out following the cooler June CPI print, but concentration in Mag 7 stocks remains extreme, which leaves little room for earnings disappointments. GOOGL and TSLA kick off Mag 7 earnings season this afternoon. TSLA results are not expected to have broad market implications given enthusiasm for a potential robotaxi business that’s 3+ years in the future. However, GOOGL’s generative AI opportunity (Gemini) is more immediate with investors looking for the company to move further from the experimentation phase to the production/monetization phase. GOOGL’s capex plans will also have implications for AI-levered names and the broader market with expectations for FY’25 capex guidance to meet/exceed $55B.

The RTY is advancing again after a brief consolidation phase that lasted only three days. The RTY broke above multi-year range resistance with an impressive +9.4% gain since the 7/11 June CPI report, but the index is now short-term overbought heading into Friday’s core PCE print. The RTY’s ability to get through multi-year range resistance on a ‘promised’ Fed rate cut was primarily due to short-covering and light positioning. All equity rotations, regardless of their ultimate duration or magnitude, start with short covering, followed by a period of consolidation. The validity of the RTY move will now be judged by its ability to make and sustain a new cycle high above last week’s 2264 close. We’ve spent a lot of time over the past several months covering the record RTY/SPX performance differential (~30 percentage points) and the potential for the entire gap to close ahead of a cyclical economic recovery. Markets move in anticipation of events, but the RTY rally is still unconfirmed by cyclical cross markets like the EuroStoxx 50 (SX5E) and copper prices.