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Q2 earnings season will rise in intensity, as there are influential reports landing in the Global Week Ahead.
Management updates can create major waves, as they produce a cascade of earnings estimates revisions, across a number of S&P 500 sectors and industries.
For 2022 Q2, Zacks Research Director Sheraz Mian expects total S&P 500 earnings to increase:
+2.1% from the same period last year, on
+9.7% higher revenues, with
Net profit margin compression of 95 basis points
Excluding a hefty contribution from the Energy sector? Then, Sheraz expects total Q2 earnings for the rest of the S&P 500 index to be:
Down -6.1%, on
+7.4% higher revenues
As for policy and macro events?
Reuters shares with us that, while the European Central Bank is late to the rate-hike party, it's going to start hiking policy rates on Thursday.
Unlike the Bank of Japan.
Fresh macro data and energy updates could make for grim reading late in this week.
‘Flash’ PMI metrics, and rows over European natural gas supplies, should shed light on how broad global and European macro growth will be shaping up, respectively.
Next are Reuters’ five world market themes, reordered for equity traders.
(1) S&P 500 earnings reports land all week long
S&P 500 companies are forecast to increase annual profits briskly this year, but they may struggle to live up to such bullish expectations, given that the U.S. economy is cooling and inflation is driving up costs.
Second-quarter earnings are tipped by Refinitiv IBES to rise nearly +6% from the year-earlier period, but JPMorgan and Morgan Stanley last Thursday got the season off to a sour start.
More misses risk driving stock markets even lower.
Goldman Sachs, Johnson & Johnson, Netflix and Tesla earnings are among those landing in the Global Week Ahead.
They will report in the shadow of the Fed, which some bet could raise rates by as much as a whole percentage point this month.
(2) On Thursday, the European Central Bank (ECB) is to raise policy rates
The ECB is about to become one of the last major central banks to join the global rate-hike cycle — with a quarter-point move on Thursday — that will be its first increase since 2011.
But if a July rate rise to tame record-high inflation is a done deal, the real question is whether a bigger hike is possible in September, given that a Europe-wide gas supply crunch may be about to trigger an economic recession.
The ECB will also be pressed on details about a planned "anti-fragmentation" tool to contain bond market stress — something that could be put to the test soon if renewed political turmoil in Italy persists.
And don't forget the euro's drop to parity against the dollar — another headache for the ECB, given how much a weakening currency exacerbates inflation.
(3) Will natural gas on Nord Stream resume its flow on Thursday, July 21st?
European businesses and governments are anxious to see whether Russia reopens its Nord Stream 1 gas conduit on July 21st, after 10 days of annual maintenance.
Supplies via Nord Stream were already cut last month to 40% of capacity, which Moscow blamed on Canada's failure to return turbine equipment sent there for repairs. The turbine is now being returned but many fear Russia will keep the gas taps off anyway in retaliation for Western sanctions.
European gas prices, up +400% since last July, could rocket higher if Nord Stream stays shut. Plans to replenish storage tanks before winter are in disarray and industrial powerhouse Germany may even be forced to ration fuel.
Gazprom is not without problems either. The grace period for payments on two international bonds expires on July 19th, and if foreign creditors are not paid by then the company will be in default.
(4) On Friday, we get a number of ‘flash’ PMI readings
From the United States to Australia, rising interest rates have not yet dampened inflation. How much they are hitting economic activity, 'flash' PMI readings will show on Friday, July 22nd.
As of June, Purchasing Managers' Indexes in the United States and Europe were above 50, implying activity was still expanding. But recent data flow, especially weaker consumer demand, indicates July readings may be softening.
That's especially so in the Eurozone, even though interest rates here have yet to start rising.
China may be the bright spot. Easing COVID-19 lockdowns lifted June PMIs back above 50, and July likely saw manufacturing, shopping and travel crank up another notch.
(5) On Thursday, the Bank of Japan (BoJ) is still not going to move rates up
The one constant among the world's biggest central banks — Japan's unwavering commitment to super-charged policy easing — will be on display again on Thursday.
Governor Haruhiko Kuroda says the economy still needs support, and will pursue that even as the yen tumbles to deeper multi-decade lows, undermined by the widening interest rate divergence with the U.S. Federal Reserve.
For Japanese businesses and consumers, the commodity-driven inflation pain could get worse, with data on Friday expected to show core inflation staying above the BOJ's target for a third month. But the BOJ may use tepid wage growth as an excuse to stay the stimulus course.
Bets on BOJ capitulation have so far proven premature, and thanks to now-daily bond buying stimulus, yields are back under control. But the binge comes at a cost — half of outstanding government bonds are now in central bank hands.
Top Zacks #1 Rank (STRONG BUY) Stocks
I found three worthy large-cap stocks on our #1 list this week.
(1) Bayer AG (BAYRY - Free Report) : This is a German large-cap pharma stock. I see a $13.66 share price, making for a $53.7B market cap. I see a Zacks Value score of B, a Zacks Growth score of D and a Zacks Momentum score of D.
With the company’s focus completely on the Life Science businesses, a new organizational structure was introduced effective Jan 1st, 2016.
In 2017, Bayer took a step toward its goal of achieving full separation from German chemical firm Covestro in the medium term by selling about 36% of its interest in that company for €4.7 billion.
(2) CrowdSrike (CRWD - Free Report) : This is an Internet Security Software company. I see a $172 share price, making for a market cap of $40B. I see a Zacks Value score of F, a Zacks Growth score of B and a Zacks Momentum score of B.
Founded in 2011, Sunnyvale, CA-based CrowdStrike is a leader in next-generation endpoint protection, threat intelligence, and cyberattack response services.
CrowdStrike’s co-founders George Kurtz and Dmitri Alperovitch were inspired by the shortcomings in the previous-generation security software technologies.
They managed to beat their previous-generation adversaries, by leveraging the network effects of crowdsourced data from its customer base, as it applied to modern technologies, including AI, cloud computing and graph databases, to detect threats and stop breaches.
(3) Ulta Beauty (ULTA - Free Report) : This a fast-growing Bolingbrook, IL, Cosmetics and Fragrance company. I see a $385 share price, making for a market cap of nearly $20B. I see a Zacks Value score of C, a Zacks Growth score of A and a Zacks Momentum score of D.
It sells more than 25,000 products from about 500 well-established and emerging beauty brands across all categories and price points.
As of May 26th, 2022, Ulta Beauty operated 1,318 stores.
In fiscal 2022, the company plans to open 50 net new stores along with carrying out 35 store remodeling and relocation projects.
NOTE: The three highlighted companies are found in very different niches. Interestingly, and tellingly, there is little in the way of broad macro growth engagement.
Key Global Macro
The European Central Bank (ECB) decisions out on Thursday are the Global Week Ahead macro highlight.
On Monday, June Canadian housing starts came out, down -3% month over month to just under 274K. There has been a huge home price bubble up there, and the BoC raised its policy rate 100 bps at the last meeting. The prior monthly number was 287K.
On Tuesday, the Eurozone’s key inflation gauge, the HICP, lands for June. I see a +8.6% y/y rate holding firm again this month.
On Wednesday, the People’s Bank of China (PBoC) delivers a policy rate decision. This central bank’s Loan Prime Rate is at 3.7%.
Canada’s CPI for June should be +8.8% y/y, up from +7.7% the month prior. That sounds very similar to the U.S. CPI circumstance.
On Thursday, we get both the ECB and BoJ central bank decisions. The ECB lowers its Deposit Rate to -0.25% from -0.5%, and its policy rate to 0.25% from 0.0%. Don’t expect any monetary policy changes from Kuroda at the BoJ.
On Friday, the S&P Global Manufacturing PMI for July, in a ‘flash’ reading, should be 52.5, in line with the prior 52.7.
Conclusion
Part of the uncertainty being priced into the stock markets — at present — relates to how S&P 500 earnings estimates evolve in an aggressive Fed rate tightening cycle.
According to Sheraz, as noted above, the stock market has a sense of what should happen to earnings estimates.
The natural order of things is rising policy rates take the edge off of U.S. aggregate demand growth, causing rate-sensitive parts inside the U.S. economy to cool.
Then, a wider range of supporting businesses start experiencing this changed reality, in their normal operations, which then shows up in their Q2 numbers and management guidance.
We have seen some of that already.
For example, consider the recent quarterly results and guidance from the likes of:
These foreshadow the arrival of many more such reports, as the Q2 report cycle ramps. That said, not every early reporting company is missing estimates, or guiding lower.
Image: Bigstock
Q2 Earnings Create Waves: Global Week Ahead
Q2 earnings season will rise in intensity, as there are influential reports landing in the Global Week Ahead.
Management updates can create major waves, as they produce a cascade of earnings estimates revisions, across a number of S&P 500 sectors and industries.
For 2022 Q2, Zacks Research Director Sheraz Mian expects total S&P 500 earnings to increase:
Excluding a hefty contribution from the Energy sector? Then, Sheraz expects total Q2 earnings for the rest of the S&P 500 index to be:
As for policy and macro events?
Reuters shares with us that, while the European Central Bank is late to the rate-hike party, it's going to start hiking policy rates on Thursday.
Unlike the Bank of Japan.
Fresh macro data and energy updates could make for grim reading late in this week.
‘Flash’ PMI metrics, and rows over European natural gas supplies, should shed light on how broad global and European macro growth will be shaping up, respectively.
Next are Reuters’ five world market themes, reordered for equity traders.
(1) S&P 500 earnings reports land all week long
S&P 500 companies are forecast to increase annual profits briskly this year, but they may struggle to live up to such bullish expectations, given that the U.S. economy is cooling and inflation is driving up costs.
Second-quarter earnings are tipped by Refinitiv IBES to rise nearly +6% from the year-earlier period, but JPMorgan and Morgan Stanley last Thursday got the season off to a sour start.
More misses risk driving stock markets even lower.
Goldman Sachs, Johnson & Johnson, Netflix and Tesla earnings are among those landing in the Global Week Ahead.
They will report in the shadow of the Fed, which some bet could raise rates by as much as a whole percentage point this month.
(2) On Thursday, the European Central Bank (ECB) is to raise policy rates
The ECB is about to become one of the last major central banks to join the global rate-hike cycle — with a quarter-point move on Thursday — that will be its first increase since 2011.
But if a July rate rise to tame record-high inflation is a done deal, the real question is whether a bigger hike is possible in September, given that a Europe-wide gas supply crunch may be about to trigger an economic recession.
The ECB will also be pressed on details about a planned "anti-fragmentation" tool to contain bond market stress — something that could be put to the test soon if renewed political turmoil in Italy persists.
And don't forget the euro's drop to parity against the dollar — another headache for the ECB, given how much a weakening currency exacerbates inflation.
(3) Will natural gas on Nord Stream resume its flow on Thursday, July 21st?
European businesses and governments are anxious to see whether Russia reopens its Nord Stream 1 gas conduit on July 21st, after 10 days of annual maintenance.
Supplies via Nord Stream were already cut last month to 40% of capacity, which Moscow blamed on Canada's failure to return turbine equipment sent there for repairs. The turbine is now being returned but many fear Russia will keep the gas taps off anyway in retaliation for Western sanctions.
European gas prices, up +400% since last July, could rocket higher if Nord Stream stays shut. Plans to replenish storage tanks before winter are in disarray and industrial powerhouse Germany may even be forced to ration fuel.
Gazprom is not without problems either. The grace period for payments on two international bonds expires on July 19th, and if foreign creditors are not paid by then the company will be in default.
(4) On Friday, we get a number of ‘flash’ PMI readings
From the United States to Australia, rising interest rates have not yet dampened inflation. How much they are hitting economic activity, 'flash' PMI readings will show on Friday, July 22nd.
As of June, Purchasing Managers' Indexes in the United States and Europe were above 50, implying activity was still expanding. But recent data flow, especially weaker consumer demand, indicates July readings may be softening.
That's especially so in the Eurozone, even though interest rates here have yet to start rising.
China may be the bright spot. Easing COVID-19 lockdowns lifted June PMIs back above 50, and July likely saw manufacturing, shopping and travel crank up another notch.
(5) On Thursday, the Bank of Japan (BoJ) is still not going to move rates up
The one constant among the world's biggest central banks — Japan's unwavering commitment to super-charged policy easing — will be on display again on Thursday.
Governor Haruhiko Kuroda says the economy still needs support, and will pursue that even as the yen tumbles to deeper multi-decade lows, undermined by the widening interest rate divergence with the U.S. Federal Reserve.
For Japanese businesses and consumers, the commodity-driven inflation pain could get worse, with data on Friday expected to show core inflation staying above the BOJ's target for a third month. But the BOJ may use tepid wage growth as an excuse to stay the stimulus course.
Bets on BOJ capitulation have so far proven premature, and thanks to now-daily bond buying stimulus, yields are back under control. But the binge comes at a cost — half of outstanding government bonds are now in central bank hands.
Top Zacks #1 Rank (STRONG BUY) Stocks
I found three worthy large-cap stocks on our #1 list this week.
(1) Bayer AG (BAYRY - Free Report) : This is a German large-cap pharma stock. I see a $13.66 share price, making for a $53.7B market cap. I see a Zacks Value score of B, a Zacks Growth score of D and a Zacks Momentum score of D.
With the company’s focus completely on the Life Science businesses, a new organizational structure was introduced effective Jan 1st, 2016.
In 2017, Bayer took a step toward its goal of achieving full separation from German chemical firm Covestro in the medium term by selling about 36% of its interest in that company for €4.7 billion.
(2) CrowdSrike (CRWD - Free Report) : This is an Internet Security Software company. I see a $172 share price, making for a market cap of $40B. I see a Zacks Value score of F, a Zacks Growth score of B and a Zacks Momentum score of B.
Founded in 2011, Sunnyvale, CA-based CrowdStrike is a leader in next-generation endpoint protection, threat intelligence, and cyberattack response services.
CrowdStrike’s co-founders George Kurtz and Dmitri Alperovitch were inspired by the shortcomings in the previous-generation security software technologies.
They managed to beat their previous-generation adversaries, by leveraging the network effects of crowdsourced data from its customer base, as it applied to modern technologies, including AI, cloud computing and graph databases, to detect threats and stop breaches.
(3) Ulta Beauty (ULTA - Free Report) : This a fast-growing Bolingbrook, IL, Cosmetics and Fragrance company. I see a $385 share price, making for a market cap of nearly $20B. I see a Zacks Value score of C, a Zacks Growth score of A and a Zacks Momentum score of D.
It sells more than 25,000 products from about 500 well-established and emerging beauty brands across all categories and price points.
As of May 26th, 2022, Ulta Beauty operated 1,318 stores.
In fiscal 2022, the company plans to open 50 net new stores along with carrying out 35 store remodeling and relocation projects.
NOTE: The three highlighted companies are found in very different niches. Interestingly, and tellingly, there is little in the way of broad macro growth engagement.
Key Global Macro
The European Central Bank (ECB) decisions out on Thursday are the Global Week Ahead macro highlight.
On Monday, June Canadian housing starts came out, down -3% month over month to just under 274K. There has been a huge home price bubble up there, and the BoC raised its policy rate 100 bps at the last meeting. The prior monthly number was 287K.
On Tuesday, the Eurozone’s key inflation gauge, the HICP, lands for June. I see a +8.6% y/y rate holding firm again this month.
On Wednesday, the People’s Bank of China (PBoC) delivers a policy rate decision. This central bank’s Loan Prime Rate is at 3.7%.
Canada’s CPI for June should be +8.8% y/y, up from +7.7% the month prior. That sounds very similar to the U.S. CPI circumstance.
On Thursday, we get both the ECB and BoJ central bank decisions. The ECB lowers its Deposit Rate to -0.25% from -0.5%, and its policy rate to 0.25% from 0.0%. Don’t expect any monetary policy changes from Kuroda at the BoJ.
On Friday, the S&P Global Manufacturing PMI for July, in a ‘flash’ reading, should be 52.5, in line with the prior 52.7.
Conclusion
Part of the uncertainty being priced into the stock markets — at present — relates to how S&P 500 earnings estimates evolve in an aggressive Fed rate tightening cycle.
According to Sheraz, as noted above, the stock market has a sense of what should happen to earnings estimates.
The natural order of things is rising policy rates take the edge off of U.S. aggregate demand growth, causing rate-sensitive parts inside the U.S. economy to cool.
Then, a wider range of supporting businesses start experiencing this changed reality, in their normal operations, which then shows up in their Q2 numbers and management guidance.
We have seen some of that already.
For example, consider the recent quarterly results and guidance from the likes of:
These foreshadow the arrival of many more such reports, as the Q2 report cycle ramps. That said, not every early reporting company is missing estimates, or guiding lower.
As we saw in results from:
We shall see what Mr. Market collectively thinks, as each Q2 report rolls in.
That’s it for me.
Have a great trading week!
Warm regards,
John Blank
Zacks Chief Equity Strategist and Economist