Stocks slipped this morning in response to the latest batch of corporate earnings, which painted a mixed economic picture. The Dow, S&P, and Nasdaq Composite all fell as tech led the way lower. Yields jumped again, applying pressure to growth stocks. The 10-year Treasury yield advanced to 3.58%, continuing its trend higher after bottoming on April 6th.
“There is a tug of war between those who are feeling optimistic that the Fed will soon be ending the rate tightening program because of softness that we’re seeing in the economy […] with those who believe the Fed will be forced to raise rates longer because the economy is not in a sense, surrendering,” said CFRA Research strategist Sam Stovall.
And Stovall’s absolutely correct; is bad news still good news? Or has the narrative flipped again?
At the very least, bad news (earnings, retail sales, and jobs report “misses”) is less bullish than it once was. Bad news has felt increasingly like truly bad news ever since the mini-banking crisis (and coming credit crunch) advanced the recession timeline for the US.
Despite the ongoing economic uncertainty, bank earnings have been strong thus far. JPMorgan (NYSE: JPM) and Wells Fargo (NYSE: WFC) both reported better-than-expected quarters on Friday. Today, Schwab (NYSE: SCHW) beat estimates as well.
Global and regional banks marched higher today despite a sliding S&P. Will the banks be able to will the indexes into another rally, though?
“It’s sort of a wait and see because what the banks giveth, the rest of the market might taketh away,” Stovall quipped.
That could translate into a “crab market” that’s content to crawl sideways until the May FOMC, which concludes on May 3rd.
Stocks could still pop higher (or lower) this week depending on how earnings look, but keep in mind that expectations are extremely low. Analysts forecasted the largest drop in earnings for S&P 500 stocks since the pandemic began.
Earnings “beats” are likely to be frequent this month as a result. The real question is whether forward guidance remains positive among the market’s top stocks.
“A massive, systemic financial confidence shock appears to have been averted, but tighter credit is manifesting in the real economy,” wrote Bank of America strategists in the bank’s Global Research report.
And so, earnings “beats” countered by uninspiring forward guidance could lead to a whole lot of frustration for traders, most of whom are waiting for a breakout in either direction.
One thing to note is that long-term Treasurys have led stocks in recent months. If Treasurys plunge while the S&P treads water, it’s usually only a matter of time until the index follows suit. The S&P is actually up roughly 0.80% since last Wednesday while the iShares 20+ Year Treasury Bond Fund (NYSE: TLT) is down a whopping 3.00%.
That’s a big disconnect. When this type of gap emerged in the past, it’s been a fairly accurate sell signal for S&P traders. Earnings releases over the last two years haven’t really been able to break this correlation, either.
We’ll see what happens as earnings continue to roll in, but Treasurys are hinting at a snap move lower for stocks in the coming days. Whether strong earnings are able to buoy equities will be interesting to watch, even though history suggests that we’re on the cusp of a short-term selloff.
