Morning Notes — CQ2 Earnings Season

Early: It’s still very early with only 55 companies in the S&P 500 having now reported Q2 results. Of those reporting, 75% have beat consensus earnings against a low bar vs the 1-year average of 71% and 5-year average of 72%. Qualitative management commentary mostly discuss a sequential improvement in demand and uncertainty about the duration/magnitude of the outbreak. But thus far, there’s been very little reference to rising case counts, the re-imposition of mitigation plans or a leveling off in high-frequency indicators.

FX: Agreement on the €750B EU relief package has helped push the euro to a new cycle high of ~1.152. Over the last few weeks, there have been a few sell-side strategists arguing for an increased allocation to Eurozone equities vs US equities given the region’s better COVID trends. Ironically, as US case counts increased, the SPX actually outperformed the SX5E due to its higher concentration in Technology companies. Eurozone equity indices have a higher concentration in Industrials, Materials and Energy, which generally benefit from a resurgent global economy. Of course, a relatively weaker dollar helps further ease financial conditions in the US, helps US multinational revenues and eases conditions for Emerging Market economies with dollar-denominated debt.

Volatility: The CBOE Volatility Index (VIX) is now testing the prior low from early June. We continue to look for lower volatility as we move into August and for this drive increased equity positioning from systematic funds (CTAs, Vol Targeting and Hedge Fund Beta strategies) that use volatility targeting as a trigger. Elevated volatility since early March has held equity positioning well below average levels for these strategies.