Good news/bad news for earnings season and markets

On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Head of AIS Portfolio and Business Consulting, Sophie Antal Gilbert discussed the latest news on government stimulus, market data, and earnings season. The short story: It's a mixed week of good news and bad news.

Fiscal stimulus and market expectations

On the topic of fiscal stimulus, Ristuben stated that the focus is on Europe, pointing toward a proposed $850 billion of additional stimulus. Ristuben said: "I think the market is expecting that to get approved and implemented. So we'll follow that pretty closely."

The other development in Europe is that 18 of the eurozone countries actually support a plan to accelerate a $100 billion lending program to directly support workers that have been displaced by the COVID-19 outbreak.

Ristuben noted that this approach "rhymes with the focus in the States," where the federal government is considering extending the $600-a-week incremental unemployment benefit which expires at the end of July. Ristuben noted that this incremental benefit has been generally viewed as effective. He stated, "When you look at real wage growth in the United States, it's actually been positive in the second quarter, which is remarkable." He noted, "The pain isn't over, so people would like to see that program extended and I think the market is expecting it." He commented that when the market doesn't get what it expects, usually there is a negative reaction.

Economic data points: The good and not-so-good

The conversation shifted to economic data, specifically manufacturing numbers, retail sales, bankruptcies and jobless claims. Ristuben noted that, generally, global economic news has been positive. The U.S. Federal Reserve (the Fed) reported that industrial production in the U.S. was up about five-and-a-half percent for the month of June, beating estimates. The Fed also reported up-numbers for U.S. industrial capacity utilization, but Ristuben cautioned that it's still only running at 69%, which he labeled as "a low number." "And that means there's a lot of slack and there's a lot of damage to still be undone in those parts of the economy," he said. "But the fact that it's moving forward and the fact that it's actually moving forward at a rate faster than the market expected—those are all positives."

Ristuben noted the connection of strong U.S. retail sales numbers and the $600-a-month incremental unemployment benefit. He noted that June U.S. retail sales were strong, up about seven-and-a-half percent (according to the U.S. Commerce Department), again beating expectations and market estimates.

On the not-so-good side of the balance, Ristuben noted that bankruptcies are up. "There's a lot of damage being done—real damage. There are 24 retailers—significant national retail chains, as well as restaurant chains, that have declared bankruptcy as a result of this lockdown."

New jobless claims of 1.3 million were reported this week in the U.S., according to the U.S. Department of Labor. Ristuben noted, "On balance, we're seeing that economic recovery scenario that we expected play out in terms of the data, but we also see that there's still a lot of pain in the system. And there's a lot of potential risk as it relates to the virus itself. On balance, we expect the economic data to continue to improve—not in a uniform, unbroken line for the rest of the year—but to continue to move at a modest pace."

Earning season beating bad estimates

The good/bad theme continued, with earnings season beating forecasts, according to Ristuben. But he pointed out that the consensus expectation for earnings growth in the S&P500® currently sits at negative-44.6%, which Ristuben called "appallingly bad," and noted similar result for Europe. He said, "Globally, the expectations are horrific and the good news is that companies are coming in a little better than expected."

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