US EARLY MORNING: Equity futures are adding to gains following June's soft CPI data

US PRE-MARKETS: US equity futures are gaining in premarket trade, with gains being led by the duration sensitive Nasdaq-100, which is being supported by lower yields (lower across the curve this morning, with the short-end outperforming) in wake of the softer than expected June CPI data, which has seen market pricing for further rate hikes diminish. The market still thinks that the Fed will hike in July, and they were always sceptical that the central bank would add another hike later this year (which the FOMC's staff economic projections had pencilled in). At pixel time, the market's expectation of terminal is around 5.36% in November vs 5.42% before the release of the CPI data. The impact on equities has been marked; Goldman Sachs notes that the SPX is now 3% higher than where it was when the Fed began its rate hikes, adding that "for first time in 2023, we are currently being asked by multiple clients if we think the S&P 500 is now on track to clock an all-time high before year end," and its strategist John Flood certainly thinks this is possible, stating that "I am going with a yes on this."

EARNINGS SEASON BEGINS: S&P 500 Q2 aggregated blended earnings are forecast to fall -6.4% Y/Y in Q2 (and -0.9% Q/Q), while revenue is forecast to fall -0.8% Y/Y (but rise +0.6% Q/Q), according to Reuters, which notes that the last time both earnings and revenue Y/Y growth declined in the same quarter occurred in Q3 2020. Q1 earnings season showed resilience, with a growth rate of +0.1%, turning positive after starting at -5.1%. That dynamic has only happened eight times since 2002. But despite the positive Q1, Q2 growth expectations have been downgraded by analysts at a slower pace compared to previous quarters, Reuters notes. Negative Q2 EPS pre-announcements outnumber positive ones, and annual growth expectations have been lowered by 2.5ppts. Under the bonnet, energy is negatively impacting the overall assessment; ex energy, earnings growth is seen to be negative for the fifth consecutive quarter. Industrials continue to show positive growth, while sectors like Tech and Materials are expected to have negative growth. Given that inflation is dominating the macro narrative, there will once again be focus on company margins, which have declined for six quarters, but then rose to 11.2% in Q1; the expectations for Q2 show a slight decline to +10.9%, with the Energy sector seeing the largest decline in margin expectations, while Tech saw an increase. FY net margin estimates for FY23 and FY24 are 11.1% and 11.7% respectively. Analysts at Goldman expect companies will be able to meet the low bar set by consensus. “Negative EPS revisions for 2023 and 2024 appear to have bottomed and revision sentiment has improved,” the bank says. GS says the key areas traders will be focusing on include: (1) ability of firms to maintain margins as inflation recedes, (2) impact of bank stress on credit and lending, (3) potential uses of AI, (4) status of the US consumer. Its estimates for 2023 EPS remain above consensus, forecasting USD 224 vs consensus USD 220, but the bank continues to view the 2024 consensus for EPS growth (of +11%, at USD 244) as too optimistic - it thinks that EPS will grow by around 5% for FY23 to USD 237.  

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13 Jul 2023 - 09:30- EquitiesData- Source: Newsquawk

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