S&P 500: Mixed earnings season builds anticipation for big breakout

<p>The Q2 US earnings season is now in its home stretch, and the companies that make up the S&P 500 index are on track to […]</p>

The Q2 US earnings season is now in its home stretch, and the companies that make up the S&P 500 index are on track to put in a mixed performance, though not as bad as many analysts had feared.

As of writing, 452 (90%) of the 500 companies have reported, with 327 (72%) beating their earnings estimates; this impressive-sounding figure is actually in-line with the 5-year average (73%) as companies are known for massaging analysts’ estimates down to a beatable level in most cases. Perhaps more significantly, only 225 (50%) of the reporting companies have beat their top-line sales estimates, below the 5-year historical rate of 57%.

According to the earnings mavens at FactSet, the blended (actual results from companies that have reported combined with estimated results for companies yet to report) earnings decline is -1.0% for the quarter and the blended revenue decline is -3.3%. If the remaining results come in roughly as expected, the S&P 500 would see its first year-over-year decline in earnings since 2012 and its first consecutive decrease in revenue since 2009. While declining earnings and revenue across 500 of the largest companies in the world’s largest economy is hardly a good thing, many traders had feared worse, so the S&P 500 has been able to hold its ground around the 2100 level of late (see below).

From our view, there are three major themes driving the Q2 results. The first factor is slowing growth in Asia. With growth in China, the world’s second-largest economy, on track to dip below 7.0% for the first time since the Great Recession, many of the large multinational companies are seeing a notable dip in their sales to entire Asian-Pacific region. Beyond the slowing economy overseas, the roughly 20% increase in the value of the US dollar index relative to last year is also hurting the sales of multinational companies that did not aggressively hedge their international exposure. Related to both of the above themes, the big decline in oil from this period in 2014 continues to ravage the performance of energy companies, though the cheaper oil prices has benefitted some manufacturers and consumer-oriented companies. Looking ahead, these factors have hardly eased thus far in Q3, and many analysts expect aggregate declines in year-over-year revenues to extend throughout the rest of 2015.

Technical view: S&P 500

As for the performance of the S&P 500 itself, the index has lost any semblance of volatility or a meaningful trend. Prices have been contained to a historically tight 100-point range from 2040 up to 2140 for more than six months now, frustrating both bulls and bears. Though there has been some notable deterioration under-the-surface in internal measures like breadth and sector rotation, the index remains stable. Not surprisingly, the daily RSI indicator has also carved out a firm range between about 36 and 62.

At this point, longer-term traders may want to wait for a conclusive breakout before committing to either new long or short trades. A break above 2140, ideally accompanied by a breakout in the RSI indicator, would signal that the long-term uptrend has resumed for a possible move up toward 2200 or higher, whereas a breakdown below 2040 (and a corresponding drop in the RSI indicator) may signal a deeper retracement toward the 1900 level is possible.

SP500DAILY8-17-2015 8-29-02 AMSource: City Index

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