Earnings Reactions Are Upside-down

Inflation was out of control, interest rates soared, bonds screamed caution and a recession seemed imminent. Yet, here we are, 20 months later with the S&P 500's bear market nearing a full recovery, just 260 points short. Talk about market resilience!

Market

Prices as of 4 pm EST, 7/24/23

Macro

As it turns out, the honor system doesn’t work in the banking sector.

The FDIC has accused some banks of misreporting deposit data following the banking crisis in March.
According to the S&P, 55 banks restated their Q4 numbers, up more than 3x from a year earlier.
You see, many banks underreported to reduce their liability for the “special assessment” proposed by the FDIC in May.
Now, the regulator has called on banks to correct those figures.

Private sector business activity expanded at the slowest pace since February in July.

Manufacturing activity increased more than expected but remains in contraction.
Services missed estimates but continue expanding, albeit at its slowest pace since February.
Price pressures, meanwhile, are still a cause for concern (particularly in services):

S&P Global

Stocks

Here’s something you don’t see every day (or, ever)…

Stocks that beat earnings estimates are underperforming those that miss.
That’s right: beats are getting punished more so than misses.
In BofA data going back to 2000, this is the first such earnings reaction.

Bank of America

Many headlines over the past 24 hours claim Morgan Stanley’s Mike Wilson has thrown in the towel.

Despite offering clients a “we were wrong,” Wilson doesn’t appear to be flipping on his position just yet.
The uber bear warns progress on inflation now represents a headwind for sales growth and falling prices could lead to reduced pricing power/lower margins.
He also notes 2023 EPS revisions have reversed and resumed their decline into negative territory.
The verdict: Mike Wilson, still bearish.

Morgan Stanley

Energy

WTI crude closed above its 200-day moving average yesterday for the first time since late August.

US oil prices now sit at the highest since April.
Driving recent gains: tight supplies, Chinese stimulus, and a weaker dollar.

Earnings

Yesterday’s highlights:

Cadence Design Systems CDNS: $1.22 EPS (vs. $1.18 expected), $976.58 million in sales (vs. $975.99M expected).

Demand for design software remains resilient amid a cyclical downturn for chipmakers.
While current quarter guidance disappointed, the company raised its full-year outlook above analysts’ estimates.

What we’re watching today:

Microsoft MSFT
Google GOOGL
Visa V
Danaher DHR
Texas Instruments TXN
NextEra Energy NEE
Verizon VZ
Raytheon RTX
Unilever UL
General Electric GE
Chubb CB
Waste Management WM
Sherwin-Williams SHW
Moody’s MCO
3M MMM
General Motors GM
PACCAR Inc PCAR
Kimberly-Clark KMB
Archer-Daniels ADM
MSCI Inc MSCI
Biogen BIIB

Top Headlines

Vehicle sales: US auto sales are expected to rise 18% YoY in July.
Help wanted: A labor shortage is threatening the US chip industry’s planned expansion.
Archegos fine: UBS will pay ~$390 million in fines for Credit Suisse’s involvement with Archegos Capital.
Pricing power: Apple is thinking about jacking up the price of its new iPhone Pros.
Buffet BTFD: Warren Buffett is buying the dip in his O&G holdings.
Debt bill: The UK is projected to have the highest debt interest bill among high-income countries in 2023.
Euro loans: Demand for business loans in the Eurozone dropped to its lowest level since 2003.
Music streaming: TikTok has launched a music streaming service in Indonesia and Brazil to compete with Spotify and Apple Music.

Crypto