Macro micro trader

While we have been looking at the technicals every week, it is equally important to not miss the fundamentals, the macro earnings picture. Many a times, in our rush to look at the daily price change, we end up missing what’s happening in actual fundamentals which would be one of the key drivers of the stock prices in the long run.

Let’s take a quick dive into the earnings picture and see what it gives us. For the sake of simplicity, we would only be focusing on S&P 500 companies in this entire post.

Earnings growth: So far 99% of the S&P 500 companies have reported their earnings and as it turns out, year on year growth for these companies has delivered a negative 4.1% earnings growth. Which means, from the valuation perspective the basket of these 99% companies are 4.1% more expensive compared to a year ago. Also, the fact that earnings have degrown over the past year, there is a reason for investors to not pile on to their long bets given that earnings have degrown. Not only that, given that we’re living in high interest rate and expected recessionary times, it would be foolhardy for anyone to believe these earnings to improve anytime soon.

Revenue growth: While earnings have degrown, revenue for these companies have barely held on with 0.9% growth over the previous year. This flat revenue growth also explains why earning aren’t growing – higher interest rates, higher inflation and uncertainty about looming recession is keeping companies’ growth at bay.

Guidance and Q3 estimates: What about the expectations for the upcoming quarter and the guidance? Expected earnings growth for the Q3, 2023 is flat at 0.5% as shown in the chart below:

Revenue growth for the third quarter isn’t expected to deliver any remarkable recovery too. Flat growth of 1.5% compared to the last year is a dismal earnings growth as per analysts’ estimates.

If that wasn’t enough, just take a look at the guidance – 63% of the companies have guided negatively for their earnings outlook of the upcoming quarter. Although, markets may have baked some of that into the price already. Unless earnings surprise on the upside, there is no reason for the bulls to be cheerful and hopeful about.

Earnings Conclusion: Based on overall earnings deliverance and estimates for the third quarter, I don’t see any reason for markets to stage a remarkable comeback. Sure there will be those bouts of ups and downs, but for markets to stage a rally towards recent highs and then to all time highs, there needs to be a remarkable change in the macro landscape that can funnel through into the companies’ topline and bottomline, which doesn’t seem to be the case. At least not in the foreseeable future.

Technicals: For the sake of not making this article a mixed bag of macro plus micro yet not letting the viewers miss out on the micro picture, sharing my view on the SPY here. I am skipping out on the ES this week and focusing on the SPY as there has been a change in the contract on TradingView, which has resulted in distortion of the chart.

Daily chart of the SPY continues to be under pressure given that it has now come back below that key channel (red) and struggles around the 20-50 EMAs, along with forming that bearish Head and Shoulders. As long as it continues to trade below that red channel, there is always a risk of breakdown towards that neckline and lower.