After nearly two months of heightened volatility, extreme price dislocation, and dramatically-shifting equity investor expectations, Q1 earnings season begins this week. It is clear that there are multiple factors likely to impact both the tone and direction of equity prices over the near term — this, away from earnings. And in some respects, it is that shift from a binary equation based on economic data and earnings to something significantly more open to subjective interpretation that has driven much of the disequilibrium present in markets.
The last article I wrote for Yahoo Finance two weeks ago was titled “Stocks are vulnerable until Q1 earnings season gets underway.” The closing sentence of that article was: “The wildcard is President Trump.” Both weeks following the publication of that article were characterized by extreme vulnerability, weak price action and Trump playing the role of wildcard.
Though several themes have driven recent equity market dysfunction and sliding prices, fear of trade wars and protectionism appear to have taken top billing. Increasingly driving panic into the trade war narrative has been the rapid escalation of its scope and size relative to US/China trading relationship. The impact of a potential trade war between the world’s two largest economies would undoubtedly be enormous on global trade. US equity markets are making that case.
The fears of a potential trade war have been compounded by the seemingly sudden realization by the general public that social media platforms have apparently been monetizing user data in ways that few had previously considered. In the process, consumers have suddenly discovered that rather than being that, simply consumers, they have actually become the product — a product, not unlike other products and commodities, that is sold by data aggregators to buyers that have found both political and economic use for their personal data. And as if that isn’t disturbing enough for many, the actual buyers of the data are unknown — and in some cases nefarious. The evolution of this conversation has led to the largest crisis in trust in the short history of social media — the result of which has led to calls for a collective re-examination of the contract between users and consumers, Congressional and Senate testimony and a sharp selloff in prices.
In this large-cap technology landscape of distrust and re-examination, there is a uniquely Trumpian twist: Amazon (AMZN). Trump, in recent weeks, has gone to extreme lengths to publicly undermine consumer trust and comfort with a brand that has become nearly ubiquitous to American consumers. Amazon has, until recently, enjoyed a high level of consumer trust and comfort. That valuable perch of trust enjoyed by Amazon has been radically upset by Trump’s repeated calls for renegotiation of its contract with the USPS, his criticism of the Bezos control-owned Washington Post, and concern over negotiations involving the Pentagon and its aspiration for harnessing the cloud in scale.
Investors have entered into a perilous stage of this long-running bull market. All three major US equity market indices have traded sharply lower from their February highs, once again setting up markets for a retest of the lows established earlier in the year. The S&P 500 (^GSPC) closed at its 200 DMA again on Friday, then came within a hair of it on Monday’s close. The Dow Industrials (^DJI) and Nasdaq Composite (^IXIC) have recently been within striking distance of that critical support. Additionally, the Dow and the S&P 500 are negative on a year-to-date basis and sport declining 50 DMA lines.
So what factor could potentially play a role in a meaningful reversal of recent trend for US equities? Given the backdrop of a brewing trade war, a collapse in trust in large-cap tech land, and a dramatic shift in investor confidence in recent weeks, the best we can hope for is a solid earnings season. And I suspect we will receive that — beginning this week. Furthermore, valuations have compressed in recent weeks as a result of the down draft in equity prices, allowing for less stretched valuations and, as a result, more attractive prices. As painful as it has been for investors, it is actually an encouraging development and should allow for meaningful Q1 EPS and revenue growth to act as a stabilizing force in this season of volatility.
Some stand out earnings releases scheduled for this week to keep an eye on include Fastenal (FAST), BlackRock (BLK), Citigroup (C), First Republic Bank (FRC), PNC Financial (PNC) and Wells Fargo (WFC).