The Next Test For The Stock Market Begins This Week


◊ Stock Market News Today ◊ … The second-quarter earnings season begins in earnest, with Citigroup Inc., JPMorgan Chase & Co., Netflix Inc. and others giving investors an early look at how some of America’s biggest companies are coping with tepid economic growth and billions of dollars in tariffs.

Stocks have busted through records recently, rising thanks in large part to dovishness from the Federal Reserve. The central bank has positioned itself to cut interest rates this month for the first time since the financial crisis.

Investors’ outlook on rates has helped equities outdistance weaker growth around the globe that has been crimped by a continuing trade dispute between the U.S. and China, the world’s two biggest economies.

Now a bleak outlook for corporate earnings is being added to the mix. More than 80 S&P 500 companies warned that their second-quarter financial results will be weaker than initially expected, including online-streaming giant Netflix, software maker Adobe Inc. and industrial conglomerate Honeywell International Inc., according to FactSet.


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That is more than usual, analysts said, and puts the broad index at risk of facing its first period of two or more consecutive quarters of declining earnings since 2016. Analysts predict second-quarter earnings will contract by 3% from a year earlier, which would be the biggest earnings decline since the second quarter of 2016, according to FactSet.

Other investors say despite downbeat estimates, they expect second-quarter earnings to be flat compared with this time last year, if not a little higher. Analysts tend to be conservative with their earnings estimates, making it easier for companies to beat lowered expectations. This happened in the first quarter, with earnings contracting just 0.3% rather than the 4% analysts predicted at the end of March. Twenty-four companies in the S&P 500 have already reported, and 20 of them have beaten estimates.



“Even though the stock market is at an all-time high, expectations about earnings is very low. That sets you up for a very good market response to earnings,” said Andrew Slimmon, senior portfolio manager with Morgan Stanley Investment Management.

So far, the prospect of the Federal Reserve cutting interest rates sometime this year has given investors an incentive to buy stocks. The S&P 500 has climbed 20% this year, rallying on days central-bank officials suggested it would slash rates to help the U.S. grow despite trade tensions and a shaky global economy.


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That happened this past week, when Fed Chairman Jerome Powell sent a strong signal to investors during two days of congressional testimony that a cut could come as soon as this month. This year, major stock indexes have hit records for the first time since the fall, after more than recouping what they lost during a fourth-quarter rout last year.

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