Fitch Downgrades And Earnings In Focus

Key Takeaways

• Government Debt Downgrade By Fitch
• Earnings Continue Better Than Expected
• Meme Stock Activity

In the immortal words of Russell Crowe’s character, Maximus Meridius, “Are you not entertained?” Of course, that question was shouted following a battle of gladiators but they are equally applicable to this year’s stock market. After adding 3% in July, the S&P 500 notched its fifth consecutive month of gains, putting the index up 19% this year. That’s nothing though, when compared with the Nasdaq Composite’s stunning 36% returns so far. However, following a rare downgrade in government securities, stocks could come under pressure.

For the first time since 2011, a ratings agency lowered its confidence rating on U.S. issued government securities. Fitch lowered its rating on the U.S. to AA+, down from a AAA rating. The downgrade was based on two main factors. First, the agency cited ongoing political fighting that continually takes place around budgeting, pushing the U.S. closer and closer to risking a default. Second, the level of debt as a percentage of GDP is a growing concern, especially with many still calling for a recession later this year. Bonds are relatively unchanged following the downgrade, but this something to keep an eye on in the coming days.

Taking a look at where we stand on earnings, it’s been a roller coaster of expectations this year. At the beginning of 2023, forecasts were for a slow start and strong finish. Much of that thesis was predicated on the belief interest rates would begin coming down in the second half of the year and corporate profits would be up 5% by the third quarter and 10% in the fourth. However, stronger than expected economic data changed the interest rate picture and along with it, corporate profit forecasts plummeted. Second quarter earnings were forecast to fall roughly 8% and those rosy late year profit forecasts subsequently fell to just about flat in the third quarter and growth of 7.5% in the fourth quarter.

As the year has progressed though, those doom and gloom forecasts are proving overly pessimistic, setting the stage for positive upside surprises which we saw in the first quarter and are again seeing this quarter. To date, 58% of the S&P 500 have reported earnings. Thus far, 83% of reporting companies beat expectations, and third quarter year-over-year losses are now forecast at just over 7% according to FactSet.

A couple of the bigger names reporting last night after the close were Advanced Micro Devices
AMD
and Starbucks
SBUX
. In the case of AMD, the chipmaker beat expectations and uttered the magic words, artificial intelligence, saying the company was making inroads with AI. That has the stock trading higher by roughly 2% in premarket. Starbucks, on the other hand, missed on sales and also missed on same store sales. While revenues were up, labor costs and investments in stores were also up, offsetting the increased revenue. Shares of Starbucks are indicated down about 1.5% in premarket.

In addition to earnings, we’re also seeing a resurgence in some meme stock activity. This time around it’s Tupperware and one of the OG meme stocks, AMC. While there is quite a bit of negative commentary around the meme stock phenomenon, it is worth pointing out that this type of activity generates stock market interest and engagement. A large number of investors tend to allocate some of their portfolio to speculation and it’s these opportunities they, along with new investors, are seeking.

Finally, some other items on my radar include oil, volatility and Thursday’s earnings. Oil continues inching higher and is indicated up a little more than 0.5% in premarket activity. As I’ve pointed out, this is a commodity that can quickly impact the inflation picture. Also, after hitting a low of 12.74 last week, VIX is up nearly 8% premarket at just over 15. Of course the increase in VIX could be a result of the Fitch downgrade and/or tomorrow’s earnings from both Amazon
AMZN
and Apple
AAPL
. Either of these companies has the potential to significantly move the market and their forward looking statements will likely influence third and fourth quarter overall earnings expectations. As always, I would stick with your investing plans and long term objectives.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.