Stocks rallied this morning with the Dow Jones Industrial Average inching closer to its longest winning streak since 2019, buoyed by better-than-expected earnings. The Dow advanced by 182 points, equivalent to a 0.5% gain, while the S&P and the Nasdaq Composite both saw a rise of 0.4%. If the Dow continues its upward trajectory, it would mark eight consecutive days of gains, the longest such streak since September 2019.
Goldman Sachs’ earnings announcement today revealed a mixed bag, with revenue beating expectations while adjusted earnings per share missed estimates, partially due to losses in real estate and its financial technology company, GreenSky. The banking giant had previously informed investors of the likelihood of mediocre results for the quarter. Despite this, Goldman’s shares remained relatively stable through noon.
Other market heavyweights such as Netflix, Tesla, IBM, and United Airlines are slated to release their earnings after the closing bell.
As it stands, Q2 earnings have been generally good; 78% of the S&P 500 companies that reported thus far have outpaced expectations. This trend further strengthened many investors’ belief in a potential soft-landing scenario, a sentiment that gained momentum following last week’s reassuring inflation data.
Reflecting on the current situation, George Catrambone, head of fixed income and trading at DWS Group, commented:
“Bank earnings are better than feared and are pushing the episodic crisis from the spring further into the rearview mirror and (thus far) continue to trade like a soft landing will occur. The commentary from CEOs mirrors what the retail sales control group told us today – which is spending is largely intact, despite some credit normalization.”
Despite earnings mostly coming in better than anticipated, there has still been a noticeable dip in the aggregate annual EPS growth for the S&P 500. But the consistent weakening of the dollar since September could soon act as a catalyst for US earnings. The US Dollar Currency Index (DXY) is down roughly 26% from its September 2022 peak.
Efforts from BRICS countries to introduce a gold-backed currency in August could drive the dollar lower still. That could lift stocks in the short-term as well as earnings in Q3.
In addition to this, there are new signs of a potential global growth rebound. Taiwan, a major producer of semiconductors and highly sensitive to global economic conditions, is witnessing an upturn in its export growth after months of decline.
Moreover, leading indicators for US manufacturing are also showing positive signs. The ISM new orders-to-inventory ratio, a critical macro indicator of global growth, has taken an upward turn as well.
Does this imply that the current rally’s going to continue long-term? It certainly seems that way.
But these trends would reverse sharply if inflation starts to pick up again. The dollar would strengthen, likely very quickly after a severe drop over the last year, punching stocks lower while hurting Q3 earnings. This hypothesis also assumes that Taiwan’s exports will rebound further, which is by no means a guarantee.
Currently, the disinflation trend is creating a conducive environment for assets and the global economy. But if inflation makes a comeback – and many analysts believe it will – that would quickly flip sentiment, leading stocks lower as investors grit their teeth in anticipation of additional rate hikes.
