Written by Norman Isaac Mwambazi

What to expect this week: Q2 earnings season kicks off, CPI and retail sales

This will be a busy week for investors as we kick off the season where companies report their earnings for …

This will be a busy week for investors as we kick off the season where companies report their earnings for the second quarter of the 2021 fiscal year (Q2 FY2021) and new economic data from the Bureau of Labour.

The stock market has performed pretty well in the period between April and June as big tech stocks, with the exception of Tesla and big financial institutions, all reaching new highs and breaking Earnings Per Share (EPS) records, so much so that analysts expect their earnings reports coming this week and the next to be pleasing to the eyes.

According to FactSet data, the benchmark S&P 500 earnings in the aggregate are expected to grow by 64% for Q2 FY2021. If the earnings match the expectations or exceed them, it would become the fastest increase in over 12 years, having grown at the same pace in Q1 FY2009.

Brian Belski, the strategist at BMO Capital Markets, noted that the excellent performance of the S&P 500 companies in Q1 FY2021 and the expected favourable earnings reports for Q2 FY2021 have forced Wall Street analysts to revise their estimates for these companies moving forward, as the economy continues to recover.

Investors are poised to receive Q2 FY2021 earnings reports from big banks like JPMorgan Chase & Co (ticker: JPM), Morgan Stanley (ticker: MS), and Goldman Sachs (ticker: GS), among others this week, and their expectations are understandably high.

Financial sector

Financial stocks have been the third-best performing S&P 500 sector so far for the year-to-date out of all 11, only behind the booming real estate and the quickly recovering energy sector. Because of this performance, Wall Street has upwardly revised the consensus outlook and expectations for the financial sector’s earnings.

FactSet Vice President and Senior Earnings Analyst John Butters said in a note to analysts and investors that since the start of the quarter, the financial sector has grown by 11.5%, from $62.7 billion to $69.8. This means that the estimated earnings growth rate for financial stocks has increased from 96.9% to 119.5%.

This growth that exceeded analyst estimates is attributed to the speedy pace of the economic recovery from the pandemic-era losses that has fuelled strong trading and investment banking results. The generally positive performance of stocks and numerous companies going public in June are other factors favouring trading and investment banking in this quarter.

As banks and investment management firms keep growing, it is worth noting that interest rates have dropped from a year-to-date high in March, and this is expected to impact their net interest income and affect their profit derived from core lending practices. As of Friday, July 9, 2021, the benchmark U.S. Treasury yield had dropped to 1.35% from the 1.77% mark it had risen to in late March.

Consumer Price Index, retail sales

Apart from earnings reports, investors are also closely following and waiting for the equally important economic data that will be released later this week.

The highly anticipated economic data is the Consumer Price Index (CPI) from the Bureau of Labour Statistics. This index shows the extent of price increases for consumers. Investors are waiting to see how the month of June faired as supply companies continue to be affected by bottlenecks in the supply chain plus the scarcity of labour which are the main factors slightly pulling back economic recovery and at the same time pushing inflationary pressure higher.

As such, the CPI for the month of June is expected to rise 0.5%, a little less than its 0.6% increase the month before. The CPI rose by 4.9% over the last year, almost matching May’s 13-year high of 5.0%. However, if we exclude food and energy prices which are more volatile, last year’s CPI would drop to 4.0% but would still be the highest rise in nearly three decades.

Paul Ashworth, the chief North America economist for Capital Economics, wrote that they expect another significant rise in core consumer prices for the month of June and noted that severe upward pressure for the CPI is dropping according to their latest data.

Ashworth’s note further suggests that the services sector, which was hit the hardest by the pandemic, like airlines, hotels, and holiday parks, is still experiencing a rise in prices. An example of this is the 8% jump in CPI airfares. 

Contrary to the early months of the year when consumers had just received their stimulus checks, analysts expect consumer spending to have dropped further in June. As such, consensus economists expect retail sales to have fallen by 0.5% in June. It is worth noting that this had dropped by 1.3% in May.

Here is the earnings and economic calendar this week:

Earnings Report

Monday: None

Tuesday: JPMorgan Chase (JPM), Goldman Sachs (GS), Conagra Brands (CAG), Fastenal (FAST) before market open

Wednesday: Bank of America (BAC), PNC Financial Services (PNC), Wells Fargo (WFC), Delta Air Lines (DAL), BlackRock (BLK), Citi (C) before market open

Thursday: Bank of New York Mellon (BK), US Bancorp (USB), UnitedHealth Group (UNH), The Progressive Corp (PGR), Truist Financial Corp (TFC), Cintas Corp (CTAS), Morgan Stanley (MS) before market open; Alcoa (AA) after market close

Friday: Charles Schwab (SCHW), State Street Corp (STT) before market open

Economic Calendar

Monday: N/A

Tuesday: NFIB Small Business Optimism, June (99.5 expected, 99.6 in May); CPI month-over-month, June (0.5% expected, 0.6% in May); CPI excluding food and energy month-over-month, June (0.4% expected, 0.7% in May); CPI year-over-year, June (4.9% expected, 5.0% in May); CPI excluding food and energy year-over-year (4.0% expected, 3.8% in May); Monthly budget statement, June (-$132.0 billion in May)

Wednesday: MBA Mortgage Applications, week ended July 9 (-1.8% expected); PPI final demand, month-over-month, June (0.5% expected, 0.8%. in May); PPI excluding food and energy, month-over-month, June (0.4% expected, 0.7% in May); PPI final demand year-over-year, June (6.7% expected, 6.6% in May); PPI excluding food and energy, year-over-year, June (4.8% in May)

Thursday: Empire Manufacturing, July (18.7 expected, 17.4 in June); Philadelphia Fed Business Outlook Index, July (27.0 expected, 30.7 in June); Initial jobless claims, week ended July 10 (350,000 expected, 373,000 during prior week); Continuing claims, week ended July 3 (3.325 million expected, 3.339 million during prior week); Import price index, month-over-month, June (1.0% expected, 1.1% in May); Export price index month-over-month, June (1.3% expected, 2.2% in May); Industrial production, month-over-month, June (0.6% expected, 0.8% in May); Capacity utilization, June (75.6% expected, 75.2% in May)

Friday: Retail sales advance, month-over-month, June (-0.5% expected, -1.3% in May); Retail sales excluding autos and gas, June (0.2% expected, -0.8% in May); University of Michigan Sentiment, July preliminary (86.5 expected, 85.5 in June); Total Net TIC Flows, May ($101.2 billion in April); Net long-term TIC Flows, May ($100.7 billion in April).