April 18, 2019 – Stocks drifted this week as earnings season got underway in earnest.
So far, about 15% of the S&P 500 has reported this cycle and 149 components of that index are scheduled to report next week.
According to FactSet, 78% of companies report so far have beaten estimates on the bottom line, with 53% beating on the top line. More interesting than the winners and losers of earnings estimate game is that actual results, combined with estimates for companies not yet reporting point to a 3.9% decrease in earnings this quarter. Granted, that’s smaller than the projected decrease as of this time last week, but declining earnings and rising stock markets don’t usually go together.
A trend we noticed last earnings season seems to be taking shape again this time around: the market seems to be digesting earnings reports individually and evaluating them relatively thoroughly. For most of 2017, anything that was remotely positive seemed to spark a market-wide buying frenzy, while at a couple of points during 2018, anything remotely negative could turn the whole market red. This time around we’ve seen what seem like measured responses to individual report, which we take as a sign of a more rational market than either of the scenarios described above.
The one area where things seem a bit off kilter is health care. With a few exceptions in the biotech sector, anything related to health care has been beaten up pretty badly over the last few weeks. Ostensibly, this is due to concerns about some Democratic presidential candidates supporting Medicare for All.
We take issue with the recent action for a couple of reasons. First, even among Democrats who have used the phrase “Medicare for All”, there seems to be some disagreement about what exactly that would mean. Second, no version of this policy has a chance of even being voted on in the Senate until after the next election cycle, which means 2021 at the earliest. Even then, getting such a measure through Congress and to the desk of a theoretical future Democratic president would require either getting 60 votes in the Senate, or the elimination of the filibuster, another point where Democratic candidates disagree. This seems like a lot of selling in fear of what seems like a long-shot scenario, but the stock market has a tendency to overreact (in both directions) at times.
Next week promises to be interesting as we’ll have lots more earnings reports to digest.
All told this week, the S&P lost 0.01%, the Nadsaq added 0.14%, and the Dow Jones gained 0.59%.
Little has changed with the major indices since last week. Support (dotted lines) and resistance (solid lines) remain the same. Major moving averages have continued higher providing additional support. The S&P, the Nasdaq, and the Dow Jones all remain within striking distance of record highs, with little resistance and adequate support.
The S&P 500 has been testing resistance around 2,920, the last level of technical resistance before new highs, but did not had the strength to break through. The S&P has had help from its 8-day moving average (red line) for the past two weeks, with semi-strong support around 2,900 helping to prevent the index from falling. Should the S&P decline, there is solid technical support around 2,860 that will gain additional support from the 20-day moving average (blue line).