Must Read Research: Earnings; European Energy Markets; Memory Demand; MSCI EM Reshuffle
At a Glance
The desk interprets the recent insights from BofA Global Research as indicative of a more cautious market amid strong earnings, particularly in the U.S. equity space, while European energy markets face critical challenges. Per the full note, the second quarter’s EPS growth of 30% suggests robust corporate health, yet the market's muted reaction highlights a shift in investor expectations. Continued volatility in European energy needs to be monitored closely, particularly as temperatures soar, pushing demand for power upwards. As the earnings momentum wanes in the third quarter, the outlook reflects an increasing dependency on factors influencing both corporate earnings and broader market sentiment.
Key Takeaways
- 01U.S. EPS growth at 30% signals robust corporate performance but less market enthusiasm.
- 02European energy market faces turmoil due to record temperatures and limited supply.
- 03The divergence in expectations among firms highlights the uncertainty in the market outlook.
- 04Upcoming earnings releases might add pressure or clarity to current market sentiment.
Full Analysis
What the desk is arguing
The desk frames the current earnings season as potentially running out of steam, illustrated by the impressive yet insufficiently rewarded EPS growth rate of 30%, as noted in BofA’s analysis. With 76% of S&P 500 companies exceeding EPS expectations, the stock market's response suggests that while earnings growth is significant, investors are seeking more than just strength; they want acceleration.
In parallel, European energy markets are under strain, grappling with extreme weather conditions that are elevating power consumption to levels not seen since the onset of the Ukraine conflict. With critical energy supplies facing constraints due to drought, the market is likely to remain sensitive to energy pricing and geopolitical developments.
Where it sits in our coverage
Our consensus target for the EUR/USD pair is currently set at 1.075, reflecting a moderate outlook considering current conditions. Notably, jpmorgan has a target of 1.10, indicating an alignment with a cautiously optimistic view, while bofa sees it at 1.04, opposing this trend.
The desk's perspective aligns closely with jpmorgan, indicating that we are at the higher end of projections. A significant divergence in views largely stems from the uncertain trajectory of earnings and energy costs that could shape currency flows.
How other firms see it
The sentiment around earnings is somewhat unified among aligned firms like jpmorgan, which expect stable growth, contrasting with more conservative assessments from bofa that suggest a bearish tilt. This divide indicates broader market uncertainty, with jpmorgan projecting sustained growth while bofa anticipates a setback based on external shocks.
For those trading in the EUR/USD, ongoing fluctuations in energy prices will be critical to monitor, reflecting the broader impact of European market dynamics and U.S. labor market updates.
What the calendar says
There are currently no high-impact events on the immediate calendar that could potentially steer market directions ahead, making it essential for traders to remain vigilant in tracking developments in earnings and energy markets in the interim.
Market Implications
Traders should watch for movements around 1.075 in the EUR/USD, gauging reaction to global earnings updates and energy market fluctuations. A robust earnings report could strengthen the Euro, while continued volatility in energy might pressure it downwards.
From the original
It's been a summer of extremes, and this week's Must Read Research highlights four themes shaping markets across regions and asset classes. Candace Browning, Head of Global Research at BofA Securities, reviews a powerful earnings season that continues to deliver broad-based EPS g
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4 itemsGrowth, Politics and Shareholder Activism: European Equities in Focus
The desk is cautiously optimistic about European equities, as they appear to be better positioned than emerging market stocks while still lagging behind U.S. counterparts. Per the full note from Goldman Sachs, European companies may deliver earnings growth around 10% for 2018, a figure that could improve if political uncertainties ease. This suggests potential for upward price adjustments in equities. Additionally, with no significant events on the calendar in the near term, the market may remain receptive to shifts in sentiment, making it critical to monitor political developments, particularly in the U.K., Germany, and France.
A fragile reprieve for the eurozone
The desk perceives a fragile economic recovery in the eurozone, spurred primarily by declining oil prices and their moderating effect on inflation, as discussed in the commentary from ING Think. Lower energy costs are expected to improve household finances and bolster business confidence, creating a conducive environment for growth unless geopolitical tensions in the Middle East escalate further. A key observation from the research highlights the region’s vulnerability, citing that renewed tensions could quickly derail the progress if no substantial negotiations occur. Per the full note, the backdrop of improved economic sentiment and suppressed inflation expectations provides a foundation for potential growth in the latter half of the year, potentially influencing currency pair movements such as EUR/USD.