Yesterday, the S&P 500 index (S&P500) extended its 4-day winning streak, soaring another 0.4% to finish at 2,793.8 points, the highest closing level since February this year. The S&P500 maintains its bullish momentum  this week on the back of investors’ optimism on the quarterly earnings season, offsetting worries about escalating trade tensions between the US and China. In this article, S&P500 analysts summarised the events from last week, and highlighted what investors should look out for this week.

Here are excerpts from the note by Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices:

Market rebounded late last week

Last week, it was a slow week for the market, as the shortened week combined with the start of summer vacation produced low trading, with positive results, and the trade issue dominated the news (again). Last Friday, the S&P 500 index closed at 2,759.82, up 1.52% from the week prior’s 2,718.37 close.  Year-to-date, the market was up 3.22% (up 4.25% with dividends), still staying in its trading range—up 6.93% from its recent Feb. 8, 2018, low and off 3.93% from its Jan. 26, 2018, all-time high (as earnings season starts next Friday).  Since the U.S. Nov. 8, 2016, election, the market was up 28.99% (up 33.34% with dividends), with the bull market (since March 9, 2009) up 308% (396% with dividends).

The Street (at least those that were there) went along with that analysis, as the market posted a broad 1.52% gain (after two weeks of declines; -1.33% and -0.89%), with Thursday and Friday, when the tariffs became real, the best days (0.86% and 0.85%). Helping to overcome the tariffs was a mostly positive Friday morning employment report (beating expectations on net adds, though the unemployment rate went up due to more workers added to the market).

Another reality, however, was that trading and actions were slow and noncommittal, as buying easily overpowered selling, so this week’s results, while nice, may not be a clear indication of sentiment.

Belief on the Street – trade dispute will get bigger

Summer arrived (as planned), along with the heat, humidity, and hot air (I think the hot air has been here for a while).  Vacation schedules started, with trading (and commissions) barely enough to support lunch at the corner cart.  However, outside the trading floor, life went on (though I know a lot of people who would argue that), as trade talk transformed into trade tariffs, complete with retaliatory tariffs, as the reaction to the reaction sparked threats of more to come.  If all this seems familiar, it’s because it has been playing out for months, with this week’s change being that the rhetoric has transformed into actions of USD 34 billion in tariffs on Chinese imports (as China put an equal amount on US imports).

The belief on the Street is that this will go on for a while and get bigger, with the US having the stronger position, but China a bit better at controlling the public outcry. Adding to the US side are economists (and number crunchers) who cite that the tax cuts and upward economic reports far outweigh the current trade tariffs (easy to say when you are not the one being taxed or the manufacturer looking for raw materials).

Earnings is dominating the market this week

This week, should be, as trading picks up, Trump nominates his Supreme Court pick on Monday night (which could affect public policy via legal interpretation), and big banks start to report on Friday (Citigroup, JP Morgan, and Wells Fargo).  While trade issues (rhetoric and actions) are expected to affect trading, earnings season will soon dominate the market, as 61 issues report next week (July 16-20, 2018), 183 the following week (July 23-27, 2018), and 144 the week after that (July 30-Aug. 3, 2018)—and if there is one thing the market knows how to play, it is earnings and guidance (doesn’t mean they will like it, but they know how to trade it and it is controllable).

Looking at the week ahead

With the second quarter (Q2) 2018 earnings starting, the quarter is expected to post a 5.8% gain over the record first quarter (Q1) 2018 and a 26.7% gain over Q2 2017.  For 2018, estimates have held their position, with a 26.8% gain expected over 2017, while estimates for 2019 (at this point) are showing an expected gain of 10.9% over 2018 (we need to get into Q3 before we can use 2019).  To date, 20 issues have reported, with 18 of them beating operating estimates and 18 of them beating sales estimates.

Nine issues are scheduled this week, with big banks starting Friday, July 13, 2018; Citigroup (C), JPMorgan Chase (JPM), and Wells Fargo (WFC) will report, starting the season.  Next week (July 16-20, 2018), will bring 61 issues (representing 17.6% of the S&P 500 market value).  The intense two-week run will start the week after that, with July 23-27, 2018, being the heaviest of the season and bringing 183 issues (39.7%).  The following week (July 30-Aug. 3, 2018) will bring 144 issues (18.9%).

This week’s economic highlights will start on Tuesday, as the JOLTS report is released.  Wednesday will open with the weekly Mortgage Application Report, followed by the Purchasing Mangers’ Index (PMI) Report, then the Wholesale Trade Report and the weekly EIA Petroleum Report.  Thursday will open with the weekly New Unemployment Claims Report and the Consumer Price Index (CPI) Report, and Friday will close the week out with the Import and Export Prices Report and the Consumer Sentiment Report.

Source: Macquarie Research - 11 Jul 2018