What will it take to get stocks to new highs? Better earnings may not do it.
Stocks have risen steadily going into earnings season, with the S&P 500 up about 5% in September as we entered earnings season this week. By early Monday morning, the S&P was only 1% from an historic high.
Since then, it's been mostly a slow drift lower.
Traders point to disappointing vaccine news and no breakthrough on stimulus talks, but stocks were looking toppy even before Treasury Secretary Steven Mnuchin said it would be difficult to get a stimulus deal done before the Nov. 3 election.
If you're looking for help from earnings, a lot of the heavy lifting has already been done.
All the banks (with the exception of Wells Fargo) reported strong earnings, yet the Street has yawned: all except Goldman Sachs are trading down on the week.
The 22 companies that had already reported prior to the banks — names including FedEx, Lennar, and AutoZone — have also reported earnings well above expectations, with average beats of nearly 25%.
Some market participants are concerned that even companies reporting earnings beats well above expectations in the coming weeks may not see a big lift, because so many — including value sectors such as industrials and materials, as well as banks — have already had modest rallies in September.
That's the opinion of BTIG's strategist Julian Emmanuel, who made it clear more was needed: "[I]n a quarter where the percentage of companies beating on earnings is unlikely to eclipse Q2's record-breaking 83.2%, more than beats may be needed to move stocks higher, already near alltime highs. Companies that reinstate guidance are likely to outperform ... Corporate America, it's on you ... give us guidance."
Jonathan Golub at Credit Suisse agrees: "Far more important than the results themselves will be guidance on the future path of earnings," he wrote in a recent note.
In the absence of robust guidance, Golub points out that the market has been sending a clear message on what matters: Growth stocks (mostly tech) are continuing to see higher earnings than value and will likely do so into 2021. Earnings estimates for the Russell 1000 Growth sector are now positive for the third and fourth quarter compared to the same period last year, while estimates for the Russell 1000 value sector remain mired in double digit declines:
(earnings ests.) Q3: Growth up 0.1% Value down 26.9%
Growth: up 3.8% Value: down 18.8%
Source: Credit Suisse
That is a huge outperformance, and given the market continues to value earnings growth most highly, it points to continuing relative outperformance of growth stocks.
So what are the chances the market could break out decisively to new highs before the election? Many analysts believe the only chance to break out is a combination of 1) stimulus with 2) more good news on the vaccine.
"My biggest concern is getting that additional stimulus out there," Steve Boyd, senior vice president at First Financial Equity, told me. "The market is counting on additional stimulus as a bridge to the vaccine."
Boyd agrees that more definitive guidance would be a big help to the markets, but he's not counting on it: "Better guidance would be a big help, but that's impossible. There's too many unknowns for most companies to give guidance. If we go into winter and there is even partial lockdowns, that would hurt earnings. And if people don't have any money, guidance won't make any difference."