Stocks began August with a minor setback as investors maneuvered through a barrage of corporate earnings and economic data.
The S&P fell 0.3% while the tech-heavy Nasdaq Composite retreated by 0.4%. The Dow outperformed, trading flat through noon.
Pharma giant Merck beat estimates with a smaller-than-expected quarterly loss and revenue that exceeded forecasts, largely on the back of strong sales from a new cancer drug. This led to a 1.6% rise in Merck’s shares. Caterpillar also beat on earnings and saw its shares rise over 7%.
Pfizer shares climbed 1.7%, too, despite mixed results attributed to a drop in Covid product sales. Uber was one of the day’s biggest losers as poor quarterly results led to nearly a 5% slide for UBER shares.
Tim Lesko, Managing Director at Mariner Wealth Advisors, reflected on the recent market performance, stating:
“We’ve had a market that’s been so strong for so many days that you get these strings of record highs on indices — basically, what feels like a relief rally that economic doom is not upon us.”
He suggested that Tuesday’s downturn could be a reaction to overbought conditions in light of the strength of the ongoing earnings season.
The current week is the most active period of Q2 earnings, with over 160 S&P 500 companies due to report their results. More than half of the S&P’s stocks have already reported thus far, and of those, 82% beat estimates. As we mentioned previously, though, S&P earnings estimates show a 7% year-over-year decline. This set a relatively “low bar” for companies to clear, which they’re mostly doing.
Outside of earnings, the market had other economic data to pore over. This included the Job Openings and Labor Turnover Survey (JOLTS), which came in marginally below expectations, and manufacturing data that demonstrated a continued contraction.
In June, job openings decreased only slightly, dropping only 34,000 to 9.58 million, remaining practically unchanged from the month prior. Still, openings hit a low unseen since April 2021, and they’re still substantially lower than the 11 million openings from a year ago.
The survey’s response rate remains buried at 31.2%, a record low. That means roughly two-thirds of employers are not responding to the survey. The JOLTS typically saw a response rate above 60% prior to 2020 by comparison. As a result, the actual number of job openings could be far better or worse than the current JOLTS implies.
Wall Street also grappled with disappointing global manufacturing PMI results, with countries such as China, Turkey, Italy, France, Germany, Eurozone, the UK, Canada, and Brazil all registering figures below 50, indicating contraction. Despite recent positive surprises in US macro data, the US Manufacturing ‘soft’ survey data and S&P Global’s PMI remained in contraction at 49.0 in July.
“Manufacturing continues to act as a drag on the US economy, the recent spell of malaise persisting at the start of the third quarter,” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. However, he noted that producers are still trying to ignore recession fears and plan for better times.
There were a few encouraging signs in the survey, though, such as an improvement in business expectations for future output and hiring trends. Declining consumer price inflation was also evident as weak demand and improved supply led to a buyers’ market for many goods. Despite these silver linings, today’s data falls short of a “no landing” scenario.
In all likelihood, the crowd waiting for a “recession skip” will be proven wrong. Government spending in fiscal year 2023 is up $1 trillion higher ($1.8 trillion total excluding student debt forgiveness) than it was in 2022 ($0.8 trillion). That alone has stretched out the current economic cycle. Deficit spending – what the government is doing now at an unprecedented clip – is supposed to only be done to lift an economy out of a recession according to Keynesian economists.
It was not intended as a way to avoid a recession. And, should spending finally abate, the US economy will eventually slow. When it does, long-term bulls could be in for a rude awakening.
