July 26, 2016, 1:45pm EST
Over the next eight business days, we’ll hear from the Fed, the Bank of Japan, the Bank of England, we’ll get a vote on fiscal stimulus in Japan and we’ll get another U.S. jobs report. And earnings of the most widely held stock in the world, Apple, to be reported after the close today, is not a too far behind, in terms of catalysts and importance for markets.
Still, over the past six months, we’ve seen hot jobs numbers and we’ve seen cold jobs numbers. But despite all of the fuss, the Fed has only flinched on the narrative about rate hikes when the macro picture turns dark.
With that, and with the post-Brexit world just a month in, the chances of them putting a telegraphed hike back on the table, given where stocks sit, is slim to none. Just weeks ago, the markets had priced the next rate hike to as far out as 2018. And even a rate cut bets were emerging.
That has all quickly reversed, and a coin flips chance of a hike by December is back in the market.
But, as has been the case for much of the year, the Bank of Japan is the real event. They will decide on policy Wednesday night. We’ve heard a lot of chatter out of Japan over the past six months, on new measures they’re considering. And now we know a spending package is on the table. But they’ve yet to come with another ‘shock and awe’ moment since October of 2014.
The element of surprise is powerful fuel for their policy actions, but they’ve haven’t done a great job of preserving that element – if anything, they’ve eroded their past work by giving markets negative surprises (balking on more action).
What about Apple?
We talked last week about the history of earnings surprises.
We said: “Last earnings season, 72% of the companies in the S&P 500 beat expectations. Still, companies dialed down expectations coming into the second quarter. Of course, then Wall Street lowered its bar. And companies are now beating estimate again.
Like it or not, that’s how Wall Street works and has always worked. FactSet says, on average (the five-year average), 67% of companies in the S&P 500 beat their analyst expectations. And they beat by an average of 4%.
That begs the question: Why aren’t analysts adjusting up their expectations on average, by 4%, given the history? As we know, better-than-expected earnings are fuel for stocks.”
The broad earnings numbers continue to project an in-line rate of positive surprises, or better for Q2 – and with bigger than average beats. Yet analyst estimates are being ratcheted down farther for Q3. That creates more fuel for positive surprises into the end of the year.
Among the steepest expected declines in earnings has been the IT sector. And Apple’s number are expected to be the heaviest drag, with a 25% weaker number than a year ago. But positive surprises from Microsoft, Intel and QUALCOMM, have already swung the expected earnings decline for the sector overall from -7% to -3.9%.
If we strip out the expected earnings decline from Apple, the sector would be projecting 2.2% earnings GROWTH for the quarter. With that, a positive surprise from Apple could really swing the pendulum on the performance perception for the quarter — not just in IT but in broader stocks.
Interestingly, the last time Apple reported two consecutive quarters of year-over-year earnings decline was mid 2013. The stock bottomed in that period. Carl Icahn disclosed a stake and called it “extremely undervalued.” The stock nearly doubled over the next 15-months.
Let’s take a look at the chart on Apple as we head into today’s report…
Sources: Billionaire’s Portfolio, Reuters
We can see in the chart that Apple, despite being the largest component of the S&P 500 , has diverged in performance this year. A positive surprise today could start the closing of this gap.
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