Lower earnings despite increased revenues

BY Janne Muta

|April 24, 2023

Friday’s trading ended on a quiet note, as there were no significant price swings in the US equity indices. The cash indices S&P 500 and DJIA closed almost flat. Throughout the week, there were not many significant moves in the major indices. Investors continued to focus on the latest earnings reports, but the reports didn’t move the markets at the index level. The bond market also experienced modest activity, as 10-year Treasury yields inched up slightly and remained just below 3.6%.

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Defensive sectors such as consumer staples (+0.72%), health care (+0.67%), and utilities (+0.29%) were in favour, while financials (-0.36%), technology (-0.32%), and commodity-related sectors lagged behind. This is an early indication that institutional investors are not adding money to cyclical sectors but are instead starting to allocate funds to the relative safety of defensive sectors.

This looks odd in light of Friday’s PMIs coming in better than expected. The PMI assessments of manufacturing and services operations for April provided a positive outlook for the state of the economy. The manufacturing PMI grew during the (50.4, 49.0 expected, 49.2 prior) month, reaching the highest level recorded since last September. Likewise, the services PMI experienced an increase, (53.7, 51.5 expected, 52.6 prior) achieving the best level observed since June.

However, looking at the earnings reports this might not be so strange. Although it's still early, the reported results show equity investors might better be safe than sorry. Currently, approximately 20% of the S&P 500 (when measured by market cap) has disclosed their quarterly earnings, showing an increase in revenue by approximately 2% and a decrease in earnings by around 6% compared to the corresponding period from last year. If revenue increases but earnings decline the outlook isn’t great. The companies have not been able to convert this increase in revenue into profits and the high inflation the US economy is battling could exacerbate the situation by decreasing margins further (increased costs for businesses) and reducing consumer purchasing power.

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DJ created a weekly inside candle last week. After a sizeable four-week rally, this is a bearish indication and increases the likelihood of the market breaking the 33 665 support level (last week’s low). A decisive move below 33 665 would probably take the market to 33 330. Above 33 874 the market could rally to 33 960.

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NAS created a lower swing high (13 197) in the daily chart last week so the market could be turning weak in the near future. However, as long as the key support level is the 12 830 level isn’t violated the market’s not ready to fall. If 12 830 gets taken out (decisively) we should look for a move to 12 714. Above 13 225, the market could trade up to 13 450 or so.

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DAX remains bullish above 15 700, but has failed to penetrate the 15 917 level three times now. If the US indices start breaking supports the DAX bulls might not be willing to defend the 15 700 support level. Should this happen, the market would probably trade down to 15 610 or so.

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Gold is bearish below 2015. Above the level, the market could trade to 2030. Below 2015, look for a move to 1960 or so. As the readers might remember from our gold analysis on Tuesday last Tuesday the weekly loss-of-momentum-candle week before indicated weakness. Now the inability to penetrate the resistance around the 2015 level adds to this bearish indication. However, the supports aren’t that far either and the T-Bond yields are at the high of the recent weekly range. This could provide support to gold (despite the signs of weakness) and could lead to ranging price action in gold.

The Next Main Risk Events

  • EUR German IFO Business Climate
  • USD CB Consumer Confidence
  • USD New Home Sales
  • USD Richmond Manufacturing Index
  • USD Core Durable Goods Orders
  • USD Durable Goods Orders
  • USD Advance GDP
  • USD Unemployment Claims
  • USD Advance GDP Price Index
  • USD Pending Home Sales
  • JPY Tokyo Core CPI
  • JPY BOJ Outlook Report
  • JPY Monetary Policy Statement
  • EUR German Prelim CPI
  • JPY BOJ Press Conference
  • EUR Spanish Flash CPI
  • CHF SNB Chairman Jordan Speaks
  • CAD GDP m/m
  • USD Core PCE Price Index m/m
  • USD Employment Cost Index
  • USD Chicago PMI
  • USD Revised UoM Consumer Sentiment

For more information and details see the TIOmarkets economic calendar.

Trade Safe!

Janne Muta
Chief Market Analyst

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Janne Muta

Janne Muta holds an M.Sc in finance and has over 20 years experience in analysing and trading the financial markets.

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