A Glance At The Start Of Earnings Season, And Yet Another Asset Price Decoupling
Tomorrow the Q2 earnings season kicks off, with Alcoa as usual leading the parade. The chart below shows all the S&P stocks that report in the coming week. The key day will be Friday when GE, BofA and Citi all report together.
With earnings still expected to post healthy gains over Q2 of last year, it will become increasingly difficult for companies to report the same type of blow out bottom line outperformance that was seen earlier in the year on continuing cost cutting, which is still accompanied by merely tepid revenue growth. If anyone is so confused as to why corporations continue to hoard cash, the record high margins may be a good place to start. CEO are not stupid and know all about the reversion to the mean phenomenon, and are stockpiling cash precisely for that, and for the imminent increase in corporate taxes, whose recent collapse has been a primary reason for the cash stockpile (a topic we discussed first about 3 months ago).
Tangentially, for readers who trade across asset classes, in addition to the recurring FX-risk decoupling seen between the carry pair of choice, another notable observation is the recent decoupling between stocks and IG bonds, as represented by the on the run IG CDS index (14). As we have demonstrated repeatedly, and as even the WSJ is finally picking up on, fund flows have been going into IG and out of stocks, which is yet another reason why credit spreads are far more likely to be indicative of reality as it is a leading capital asset class, not a lagging one. Yet somehow spreads manage to tighten in the pursuit of stocks, even as IG suggested the S&P is about 50 points rich to a credit implied fair value. A useful pair trade would be to sell stocks (which are typically overvalued when compared to AUDJPY fair value) and buy IG credit (sell CDS) should this trend persist. We will keep you posted.
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