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Value Stocks Surged, Tech Sold Off: What Wall Street’s Saying

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Stocks rose a bit Tuesday, but the market was defined by a sell-off in high-flying tech names and a massive rally in beaten-down value names. Earnings are rolling in and stimulus is ongoing, in a moment when many are scrutinizing the outlook for value stocks. 

The S&P 500 rose 0.17%, while the tech-heavy Nasdaq, the components of which have a heavy market cap weighting in the S&P 500, fell 0.81%. The 10-Year Treasury yield fell to 0.6%, a risk off signal, contrary to the signaling in the equity market. 

Large cap cyclicals, beaten down since mid-June and trading at relatively inexpensive valuations, more than led the market Tuesday. Large cap consumer discretionary, oil, banking, industrials and materials rose between 0.88% and 6%. The NYSE FANG Index fell 1.4%. Investors had piled into growth tech to shelter from economic and virus-related headwinds for more than a month, until cyclicals got beaten up too harshly. And now earnings are rolling in. 

And ahead of those earnings, second quarter economic surprises have been fairly frequent and of a large magnitude, especially in consumer spend. Companies are beating estimates and saying that demand trends to end the quarter look strong, as lockdowns eased and monetary and fiscal stimulus flooded the economic system. Coca-Cola  (KO) shares rose 2.32% after beating on earnings estimates and saying it saw improvements in its lockdown-sensitive away-from-home channel, which comprises 50% of revenue. Coca-Cola didn’t issue guidance due to virus and economic uncertainty. IBM  (IBM)  beat revenue and earnings estimates and the stock rose as much as 2%, before falling marginally into the red. IBM didn’t offer guidance on the earnings print. 

Now, the positive earnings trends are met with questions about more fiscal stimulus amidst paused reopenings and surging virus cases. 

Also, the European Union agreed — after many months of a 27-country debate and economic destruction — to a $2 trillion fiscal stimulus plan. This is a positive for EU-exposed stocks in the U.S., like Fiat-Chrysler  (FCAU) , which started off the day up 1% before falling a bit. The Euro Stoxx 600’s gains eased throughout the day. 

Here’s what Wall Street’s saying: 

Tony Dwyer, Chief Market Strategist, Canaccord Genuity to TheStreet on Cyclical Value:

"I really don’t think it’s the earnings estimates. Here are the drivers of what’s gong to make value outperform: we have an incredible monetary stimulus. We have a Federal Reseve that is literally saying we’re just printing money. We’re going to do it for the foreseeable future. We know that the government is coming up with a second fiscal stimulus package to battle the unemployment rate and the impact of COVID. It’s the promise of low interest rates. It’s allowed investors to buy corporate bonds and new-issue equities and hand-over-fist. This is putting a lot of money in the corporate coffers. There’s so much money and you’re just beginning to turn global economic activity.” 

Charlie Smith, Chief Investment Officer, Founding Partner, Fort Pitt Capital Group on EU Stimulus:

"More than anything, this package postpones/puts off deflation for another day - which is particularly positive for cyclical and commodity suppliers. I think the character of the U.S. rally today (cyclicals and energy leading rather than growth) indicates markets are happy to see additional demand stimulus in the system. Some are lauding the fact that the EU was able to get agreement from all 27 member states. But agreement only came after they offered 312 billion Euro of grants (not loans – and more than 41% of the total 750 billion Euro package) to member states. Who wouldn’t sign up for absolutely free money? Any leader who didn’t would look silly. I don’t know what strings (if any) are attached in terms of future obligations/requirements for those who took the money, but that would be my next question.” 

Lori Calvasina, Chief U.S. Equity Strategist, RBC Capital Markets:

"The percent of companies beating consensus expectations has been strong in 2Q reporting season so far, but this has been anticipated by investors.  Earnings sentiment (the percent of sell-side EPS estimate revisions to the upside) collapsed due to the pandemic, falling to 8% (slightly below Financial Crisis lows) in early April. But we’ve seen a dramatic improvement ever since, with the percent of upward EPS estim ate revisions returning to 57% in mid July.  Bottom up consensus estimates for 2020 have been significantly cut, tracking at $124 as of mid July, with little change of late. This is close to our own $126 forecast. The cut is similar to what happened to EPS forecasts in 2009 and suggests 2020 forecasts may have come down enough. However, 2021 estimates still seem too high. At $162, 2021 consensus EPS is tracking well above our own $149 EPS forecast. They are also implying 2021 EPS will rebound to 2019 levels, which we have serious doubts about based on company commentary on earnings calls."

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