Morning Notes — Low Bar

CQ2 earnings: Three large banks (BAC, C and JPM) report Q2 earnings tomorrow before the open with loan loss reserves and forward guidance around reserves as the most critical metrics to watch. Any commentary tied to the consumer and small businesses will also receive a good amount of attention. The overall theme this quarter is about a lack of visibility, wide dispersion among estimates and a low hurdle rate. Consensus is looking for S&P 500 earnings growth to be negative 45% year-over-year on negative 11.5% revenue growth. The low bar sets a scenario for earnings beats to power a Cyclical/Value (Materials and Financials) rally, possibly at the expense of software names that sit at record high valuations. In the recent past, periods of Cyclical/Value strength have been short-lived affairs of 4-8 weeks and anything longer than that probably requires a very optimistic view of underlying GDP growth.

Banks: The fundamental backdrop for banks could be the worst in history with thin Net Interest Margins, record loan loss reserves and expectations for record low in loan/deposit ratios. But the bar is so low that any beat could also drive meaningful upside. Sentiment around banks is key to any Cyclical/Value rally and results could possibly signal the worst is behind them. Note the implied volatility in options pricing for the large cap banks is double the recent realized historical level.

Cross-market: Last week, we highlighted weakness in the Gold/Copper ratio as an early cross-market indicator for a Cyclical/Value rally. The gauge broke key technical support on Thursday and broke below its 200-day Moving Average today.