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Earnings season has started and initial results are confirming a slowdown in the economy. United Parcel Service, Ford, General Motors, Alphabet(Google), and Tesla missed earnings expectations, and that signals a softer outlook for the rest of the year. Tech giants Nvidia, Microsoft, and Apple continued to slide, and they haven’t even announced earnings. You can imagine, analysts are poring over the earnings data hoping for signs that the tech can continue. In addition to earnings, seasonality is working against stock prices; August and September tend to be weaker periods and the Presidential race will most likely increase volatility. The Volatility index is up 46% in the month of July.
“What we’re seeing during this earnings season is the growing gap between the rather optimistic profit consensus from analysts and slowing economic growth,” said Benoit Peloille, Chief Investment Officer at Natixis Wealth Management. “With unemployment now on the rise, earnings disappointment is to be expected and that’s what we’re seeing this week.”
So far, approximately a fifth of S&P 500 companies have reported earnings and the S&P 500 and Nasdaq 100 indexes are telling us that results are not acceptable. At the close of trading on Wednesday, July 24, these indexes suffered their biggest losses since late 2022. Money continues to rotate from AI Tech companies to healthcare and energy stocks which tells us that investors are bent toward risk-off. Treasury yields on the two-year note briefly fell below 4.40% for the first time in five months. The inverted yield curve has been a reliable indicator of recessions but many believe this could be the first false signal. Of course, that means the Fed will have to time the reduction of interest rates with near perfection.
Amid the weaker earnings reports, a few bright spots emerged. IBM, Chipotle, KLAC Corporation, Molina Healthcare, and AT&T all reported better-than-expected earnings.. Though some stocks are reporting positive earnings, it should be clear that our economy is cooling, something we have been saying since late 2023. As you can see, several headwinds could create some formidable challenges for the markets. Active management by way of careful stock selection and allocation along with downside protection is prudent at this stage of the business cycle. Working to mitigate some of the risks, our covered calls are shorter term and closer to the money. For our cash positions, money markets are still yielding close to 5%, an attractive return while we play defense.
Have a wonderful weekend.
