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Corporate Earnings, Bank Breakthroughs and the Debt Ceiling

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This week’s focus will be on US debt ceiling negotiations (the next meeting between President Joe Biden and congressional leaders is set for Tuesday), speeches by Fed members, regional bank “breakthroughs”, and corporate earnings.


Starting from the end, the corporate sector beat analysts’ expectations again: S&P 500 earnings fell 3% year-over-year versus an expected 7% decline. In Europe, earnings were up 3% y-o-y, a positive surprise factor of 10% versus IBES estimates.

Overall, revenues grew by 4% in both the US and Europe.

The problem is that profit margins increasingly show signs of inflection. Moreover, the market reaction to earnings has been muted, with stocks that have beaten estimates performing worse on average.

The lack of enthusiasm could be due to an uncertain economic climate stemming from problems in the banking sector and the threat of recession. In addition, the data in the quarterly reports is somewhat outdated.

A perfect example would be the U.S. banking sector. Despite posting record profits of $80 billion, up +33% (year-on-year), investors “yanked $2.1 billion out of financial stocks in the week through May 10, the most since May 2022.”

On the one hand, this may be due to the general uncertainty in the economy. On the other hand, to the fall in credit demand, U.S. financial institutions registered a 56% (y-o-y) drop in commercial mortgage disbursements in the first quarter.

According to Berkshire Hathaway vice chairman Charlie Munger, U.S. banks are saddled with “bad loans” for commercial real estate development. It is estimated that, in the face of tighter credit conditions and higher interest rates, the number of defaults could increase by as much as 20% this year, or about $90 billion.

In light of the above and the drop in the University of Michigan’s consumer confidence index for the US to a six-month low of 57.7, the Fed could pause its rate hike (great news for XAUUSD).

Looking for confirmation or at least clues, investors will monitor Bostic’s speech on Monday, Goolsbee’s on Tuesday, and Jerome Powell’s appearance on Friday. All in all, there will be nine Fed appearances in total.


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