Stocks fell Monday, but the market was bifurcated, as tech stocks plummeted in the final hour of trading. Earnings season is kicking off for the second quarter and Wall Street is sorting through several questions.
The S&P 500 fell 0.94%, with the tech-heavy Nasdaq down 2.13%. The 10-Year Treasury yield fell hard to 0.63%, a risk-off signal, even as large cap cyclical stocks rose.
Growth tech stocks, which investors have piled into in the past month in order to avoid economic turbulence posed by rising virus cases, paused state reopenings, and an uncertain picture on fiscal stimulus, have had a solid run in that time.
However on Monday the tech rally lost some steam. The NYSE FANG Index and the iShares PHLX Semiconductor ETF (SOXX) - Get Report fell 3.11% and 1.64%, respectively. Together, they have the largest market weighting in the S&P 500 out of any sector and by a wide margin. This dragged the index down.
Cyclical stocks mostly rose. Large cap consumer discretionary and energy fell a bit, but banks, industrials and materials rose between 0.34% and 1%.
This week marks the first week of major earnings reports in the second quarter, which analysts expect will post a 45% year-over-year decline. That’s expected to mark the trough in earnings from the virus-induced recession, which investors have already somewhat looked past, especially as monetary and fiscal stimulus have pumped through the economic system.
Cyclical sectors, many of which have seen corrections since June 8, will report earnings. Big banks kick things off this week. The Invesco KBW Bank ETF (KBWB) - Get Report is down just under 30% since June 8, representing a bear market, and investors seem interested in owning banks ahead of earnings. The fund rose 1% Monday, capping a two-day gain of roughly 6%.
Some investors are gearing up for earnings beats. Economic data in the second quarter largely beat expectations and support the view of a V-shaped recovery. The Citi Economic Surprise Index recently shot up to a score of 222, far above its historical trend of around 50.
But while earnings for the reported second quarter could surprise to the upside, recent virus and state reopening data paint a darker picture for the near future. In recent weeks, OpenTable data show a decline in seated diners by roughly 60% year-over-year, worse than a bounce in June to just a 50% decline. The measures of mobility and transit are performing poorly of late, while airline volumes are trending up slightly.
Importantly, PepsiCo (PEP) - Get Report shares rose after beating revenue and earnings estimates, but offering no guidance. The company's away-from-home sales, which happen at restaurants and sporting events, caused North America Beverage sales to fall 7%. But the stock still rose 0.33% Monday, even as management said the lack of certainty on the virus and reopenings is disabling the company from forecasting.
Here’s what Wall Street’s saying:
Lori Calvasina, Chief U.S. Equity Strategist, RBC Capital Markets:
"A pivotal earnings season is underway, in which we still see risk of downward revisions. We are worried that investors are already anticipating less bad than feared results. Our earnings sentiment indicator shows that 56% of recent sell-side EPS estimate revisions for 2020 and 2021 have been upward revisions. We also continue to see risk of a resumption of downward revisions, as bottom-up consensus estimates are still tracking at $162 for 2021, in line with 2018-2019 levels (we continue to think profitabi lity won’t be back to normal by then) and our own model projects $149. We’ve read through the transcripts of the S&P 500 companies that have report ed since June 30 th , and the themes of this reporting season aren’t yet clear to us. We’ll be most focused on what companies are saying about fu ture dividend and buyback activity, guidance and the path of recovery, and recent developments in business activity. So far, some companies are highlighting ongoing sequential improvements in business activity, while others are highlighted ongoing uncertainty which hinders the ability to provide guidance."
Mike Wilson, Chief U.S. Equity Strategist, Morgan Stanley:
“There is no debating the fact that this month has bene very difficult for many of the early cycle/recovery stocks. However, we think it represents a consolidation of the first leg higher during which cyclicals have trounced defensive oriented stocks. To us, this represents a clear change of leadership from the late-cycle environment of the past few years during which cyclicals consistently underperformed defensives. Part of this is function of economic forecasts getting cut too much at the depths of the recession. Earnings revisions likely found the same fate, but with revisions breadth bottoming in mid April, equity markets never looked back."
Tony Dwyer, Chief Market Strategist, Canaccord Genuity:
“The increase in COVID-19 spread and a Biden lead over Trump in the polls have kept the markets in a consolidation pattern. While the mega-cap stay-at-home stocks continue to boost the major indices, underneath the surface there has been clear signs of consolidation since early June. Since early June, we have been expecting a drawn-out period of consolidation given the historic surge in the markets since the March 23 low, with the plan of adding risk on a pullback to S&P 500 3,000. With Q2 EPS reporting season and likely cautious corporate guidance kicking off this week with the major banks, we see no reason to change that game plan."