CA - S&P 500 Earnings: Fed Funds Hike Next Week And Microsoft Alphabet Report

2023-07-21 20:20:00 ET

Summary

• According to the CME FedWatch tool, there is a 99.5% chance the new fed funds range after Wednesday’s release will be 5.25% to 5.50%.
• This week, after commenting on it last week, the global custodian banks performed well, particularly Northern Trust.
• The forward 4-quarter estimate (FFQE), fell a whopping $0.03 this week to $229.94 from last week’s $229.97, and early January, ’23’s $228.98;

Don’t forget the FOMC release is Wednesday afternoon, July 26th, and according to the CME FedWatch tool, there is a 99.5% chance the new fed funds range after Wednesday’s release will be 5.25% to 5.50%. Remember, history tells us any probability over 60% on the FedWatch tool, has never not happened.

This week, after commenting on it last week, the global custodian banks performed well, particularly Northern Trust ( NTRS ). Even the iShares Regional Bank ETF ( KRE ) rose 7.5% this past week. Charles Schwab ( SCHW ) too had a big week, up 13.60% after FHLB balances fell.

Expenses ran a little hotter than expected, although organic “net new asset growth” was decent at +5.3% for Q2 ’23. (As the top 10 client holdings have indicated, Chuck has been a top 10 position for years, but as of June 30 ’23, the stock was down 31% YTD. Very little SCHW has been sold YTD.)

The earnings reports of interest next week:

• Microsoft ( MSFT ): Tuesday, 7/25, AMC
• Alphabet ( GOOGL ): Tuesday, 7/25, AMC
• Coca-Cola ( KO ): Wednesday, 7,26, BMO
• Boeing ( BA ): Wednesday, 7/26, BMO
• Intel ( INTC ): Thursday, 7/27, AMC
• Bank of Montreal ( BMO ) – before market opens
• AMC Entertainment Holdings ( AMC ) – after market closes

Exxon ( XOM ) and Chevron ( CVX ) report Friday morning, 7/28/23, before the open, and reports such as AT&T ( T ) and Visa ( V ) and several others will be scrutinized as well, just to see what the commentary details.

AT&T doesn’t trade well at all. S&P and Moody’s rate T’s long-term debt, BBB/Baa2 and the amount of long-term debt outstanding is $138 billion, down from $180 in mid ’21 (which is a plus), but that’s a lot of debt outstanding.

Yes, the lead cable news led to a sharp decline in the stock this week, but the common stock currently sports an 8.5% dividend yield, and here’s the trend in free cash flow for T:

• 2023: $2.3 billion (one quarter, as of March ’23):
• 2022: $12.4 billion
• 2021: $26.4 billion
• 2020: $28.4 billion
• 2019: $29.2 billion
• 2018: $22.8 billion

Source: Refinitiv’s Eikon

S&P 500 data:

• The forward 4-quarter estimate (FFQE), fell a whopping $0.03 this week to $229.94 from last week’s $229.97, and early January, ’23’s $228.98.
• The P/E on the FFQE is 19.7x this week, versus 19.6x last week, and 17x to start 2023.
• The S&P 500 earnings yield ended the week at 5.07%, versus 5.10% last week, and 5.86% to start the year.
• The Q2 ’23 S&P 500 “upside surprise” or beat rate is 7.4% as of this week, actually a little bit stronger than Q1 ’23’s +6.8%. That’s good news.

Here’s a great chart from FactSet, posted to Twitter this week, showing the “average” upside surprise or beat rate for the S&P 500 for the last 5 years, which is horribly distorted by the Covid period. The 9 quarters pre-Covid averaged just 3.4% versus the above bar chart’s average for the 20 quarters of 8.8%.

Don’t bank on 8.8% every quarter. Jeff Miller, my now-deceased friend who ran the popular “Dash of Insight” blog on Seeking Alpha, and was someone I used to commiserate with about S&P 500 earnings data many times, thought the “average” upside surprise was historically between 2% and 5%.

Ed Yardeni probably has some thoughts on this topic, but I can’t specifically recall the commentary.

The point being the average upside surprise on the S&P 500 for long periods of time is probably between 2% to 5%.

Summary/conclusion: Microsoft and Alphabet are two more “Magnificent 7” stocks (as someone coined them) to report Q2 ’23 financial results this coming week, and given how Netflix ( NFLX ) and Tesla ( TSLA ) responded to their respective earnings reports – both higher quality, large-cap growth stocks – the mega-cap names could be in for some profit-taking.

This chart from Chris Kimble speaks volumes:

Note the sentiment too.

The technician Trinity uses to provide technical analysis – Gary Morrow (Twitter: @GarySMorrow) – thinks some selling might be in store for technology stocks and the Nasdaq in the near future.

Gary thinks the SMH or the semiconductor index is hitting a wall, which is interesting given how well Intel traded this week. IBM ( IBM ), Cisco ( CSCO ) and Intel have held up as the market seems to be sniffing out value and long-out-of-favor tech stocks.

Take all this as one opinion and with a considerable grain of salt. Past performance is no guarantee of future results and none of this is advice. Writing about S&P 500 earnings data keeps me disciplined and focused and makes sure that I at least stay on top of the data week to week.

All S&P 500 EPS and revenue data is sourced from IBES data by Refinitiv, unless otherwise noted. Readers should gauge their own appetite for market volatility and adjust accordingly.

Thanks for reading.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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