Earnings Season is upon us. Fourth-quarter estimates for S&P 500 companies customarily have been gradually revised lower over the past several months. Heading into this, equities rallied huge last week, although the major US indices are off their December highs. Long rates could play the role of a catalyst.
Last Wednesday, major financial firms such as JP Morgan (JPM) and Goldman Sachs (GS) reported their December quarter and they hit it out of the park. The fourth-quarter reporting season has just begun, and if these firms’ results are a sign of things to come, good news awaits equity bulls. Hopefully for them, the bar has been lowered enough for these companies to meet or beat.As of last Thursday, S&P 500 companies were expected to ring up $61.32 in operating earnings last quarter, which was up $0.23 from 10 days ago. When the December quarter began, the sell-side was expecting $63.22. Consensus estimates, as a matter of fact, took a nose-dive in the second half of June when these analysts were expecting $64.66. In March 2023, they were as high as $65.51 (Chart 1).
Ahead of this, equities are pricing in tons of optimism. The S&P 500 rallied 2.9 percent last week to 5997, rallying in four of the five sessions, including Wednesday. The large cap index opened the week on a sour note with weakness early on Monday, but the intraday weakness was bought, with bids showing up at four-month horizontal support at 5770s (Chart 2).Through Friday’s low of 5773, the S&P 500 was down 5.4 percent from its all-time high of 6100 posted on December 6. Until now, bulls have been unable to take out trendline resistance from that peak, with last week essentially ending flat on that. There is horizontal resistance at 6010s going back a couple of months, and on Friday, sellers showed up there even though it was an up session.As things stand, the daily has room to head higher, and momentum will decidedly switch the bulls’ way once this dual resistance gives way.
Help can come from the long end of the treasury yield curve.Last week, the 10-year yield gave back 17 basis points to 4.61 percent, but not before ticking 4.81 percent intraday Tuesday. This is a lower high versus a 16-year high of five percent (4.997 percent, to be exact) reached in October 2023 (Chart 3).In the weeks leading up to last week’s action, the 10-year enjoyed several important technical wins, including horizontal breakout at 4.3s, followed by takeouts of trendline resistance from October 2023 and horizontal resistance at 4.5 percent. The latter is now in play, with Friday touching 4.57 percent at the session low.At some point, a retest of 4.3s is the path of least resistance.
If these yields come under pressure, equities do not necessarily have to respond positively. In the current context, they likely will, and evidence for that will come from how small-caps react.The Russell 2000 is at a potentially important juncture. Last week got off to a shaky start as the small cap index tagged 2159 intraday, essentially testing the 200-day at 2167, and the weakness was bought. The last time the average was successfully tested was August last year when the index tagged 1993 and reversed higher. Thus far, the test has been successful.For the week, the Russell 2000 jumped four percent to 2276, which is slightly past crucial horizontal resistance at 2260s. This price point goes back to mid-July (last year) and has witnessed quite a few duels between the bulls and bears. Just above at 2300 lies dual resistance – trendline resistance from November 25 (last year) when the index ticked 2466 and one-month channel resistance (Chart 4).When the Russell 2000 posted that high last November, just past the prior high of 2459 from three years ago, sellers immediately showed up. The good thing from the bulls’ perspective is that the subsequent weakness – down 12.5 percent at one time – has been welcomed. Hence the importance of upcoming reaction to potential weakness in the 10-year treasury yield. If it transpires in the sessions/weeks ahead and the Russell 2000 does not respond, that will be a problem.
This would have come at a time when small-business optimism just jumped to a multi-year high. In December, the NFIB optimism index rose 3.4 points month-over-month to 105.1 – the highest since October 2018. Pre-presidential election in November, the index was at 93.7 in October and 91.2 in August.Similarly, the ‘outlook for expansion’ sub-index jumped six points m/m in December to 20; it was at four in September. December job openings, in the meantime, dropped a point m/m to 35; it was 34 in September. Job openings remain suppressed (Chart 5). These businesses have gotten quite optimistic in their outlook, but they are not yet ready to translate this into job creation, capex and inventory build, and what not.Interest rates are relatively high, and small businesses tend to have a larger exposure to these dynamics, as they are to the ups and downs of the domestic economy. The irony is, if the US economy holds up well, possibly putting upward pressure on inflation, rates may have less room to head much lower. This is true in both the short and long end of the curve. For now, rates on the long end have room to head lower – due to more technical than fundamental factors – and how these small-caps react to this will be telling.More By This Author:CoT – Peek Into Future Through Futures, Hedge Fund PositionsEven Before Friday’s Jobs-Induced Selloff, Sellers Showed Up Last Week At Important Technical Resistance On Major Equity IndicesEquity Indices Itching To Move Higher N/T
