Three quick ways to measure the second-quarter results season in America

America’s headline S&P 500 index is up by just 2% for the year in dollar terms, which seems like a pretty paltry return given how bullish everyone seems to be.

Worries over tariffs, inflation and a steely Federal Reserve, which seems unwilling (quite rightly) to mollycoddle the markets, are all weighing on share prices and once Independence Day is out of the way investors will start to focus in the second-quarter earnings season. This revs up with Delta Air Lines on Thursday 12th July and then really hits top gear on Friday 13th when megabanks JP Morgan Chase, Citigroup and Wells Fargo will publish their latest earnings.

Hopes for strong profits growth helped to fuel the S&P 500’s strong advance in late 2017 and early 2018 as analysts factored the Trump corporate tax cuts into their estimates.

After 20% year-on-year growth in Q1, the consensus is looking for a 38% advance in Q2, buoyed by tax cuts, share buybacks, initial dollar weakness and also a strong operational performance from oil and tech firms in particular.

Source: Standard & Poor's

US stocks trade near all-time highs and it is easy to see why, since profits are at an all-time high and so are operating margins across the S&P 500’s members.

But that also means growth forecasts must be met and margins maintained or increased to keep stocks going ever-higher. It will therefore be interesting to see if any US firms flag any negative impact from tariffs, costs or the dollar as any disappointments could be poorly received.

Checking all 500 results statements between now and early September is probably going to be too laborious a chore for most investors, so three useful stock indices might help them cut out some of the donkey work and help them take markets’ temperature as the numbers flood in.

They are the Dow Jones Transportation index, the Philadelphia Semiconductor index (known as the SOX) and the Philadelphia Banks index. They tap into three key sectors of the US economy and stock markets and tend to be good indicators of wider sentiment. While the past is by no means guaranteed to repeat itself, the S&P 500 tends to do well when they are doing well and badly when they are doing badly.

Transports

It is therefore of some concern to see the Dow Jones Transportation index roll over. It is now down 1.5% for the year, compared to the 2.0% gain in the S&P 500.

This does not sit easily with estimates for 3.5% to 4.0% GDP growth for the USA in the second quarter but stock markets look forwards, not backwards, and the implication is that America may not be able to win any trade war or keep growing at such a speed independently of events across the rest of the world in the future.

Source: Thomson Reuters Datastream

Chips

The Philadelphia Semiconductor index, or SOX, contains 30 companies who are involved in the design, manufacture and sale of silicon chips and it is therefore a very useful guide for investors on two counts.

• These integrated circuits are everywhere, from smart phones to computers to cars to robots, so they offer a great insight into end demand across a huge range of industries and therefore the global economy.
• Chip-makers’ and chip-equipment makers’ shares are generally seen as momentum plays, where earnings growth is highly prized and valuation less of a consideration. As such they can be a good guide to broader market appetite for risk.

Source: Thomson Reuters Datastream

It is therefore disconcerting to see index member and DRAM manufacturer Micron take a pasting even after its quarterly numbers in June beat expectations, to suggest that at best the chipmakers are taking a breather after a strong run and at worst looking overbought and overvalued.

The whole index has sagged a little and Intel’s numbers on 26 July – and the market’s reaction to them – could be a key test.

Banks

American bank stocks suffered a shocking run at the end of June as investors nervously awaited the latest Federal Reserve stress tests. Deutsche Bank’s US operations failed and others, notably Goldman Sachs and Morgan Stanley, were told to leave dividends and buybacks broadly unchanged so they could top up their capital buffers.

It could therefore have been a lot worse so perhaps the banks will now kick on again. Both the economy and the financial markets do need healthy banks if they are to thrive so any further weakness in the Philadelphia Banks index could warn of economic and market troubles ahead – the sector lost momentum well before indices such as the S&P 500 in early 2007, before the Great Financial Crisis broke.

Source: Thomson Reuters Datastream

These articles are for information purposes only and are not a personal recommendation or advice.