Wall Street rally is continuing for nearly one and half months after a market rout in May. While this rout was primarily attributed to an abrupt breakdown of U.S.-China trade talks, the latest rally is predominantly influenced by the Fed’s strong signal of an interest rate cut this month. The rally continues despite lingering trade conflict.
While Fed’s willingness to cut rate — popularly known as Fed put — is likely to boost investor sentiment, Wall Street is also facing an immediate concern of a negative earnings session for the second quarter of 2019. Can Fed put be strong enough to overcome a possible decline in second-quarter earnings, thereby maintaining Wall Street’s momentum seen so far in 2019?
Bleak Expectations From Second-Quarter Earnings
At present, the market is anticipating a negative earnings session for the second quarter of 2019. As of Jul 10, total Q2 earnings for the are expected to be down 3.3% from the year-earlier period on 4.0% higher revenues. This would follow the 0.2% earnings decline on 4.5% higher revenues in Q1.
If the current consensus estimate for the second quarter proves itself true, then it will be two consecutive quarters of earnings decline for the S&P 500. Technology, Aerospace, Basic Materials, Construction and Conglomerates sectors are likely to witness double-digit decline in second-quarter earnings. (Read More: Previewing the Q2 Earnings Season)
Wall Street Hit Record High on Fed’s Rate Cut Signal
On Jul 10, in a testimony to the House Financial Services Committee, Fed chair Jerome Powell reiterated the central bank’s commitment to act as appropriate to sustain U.S. economic expansion, giving a clear message of a rate cut possibility in the upcoming FOMC meeting scheduled on Jul 30-31.
At present, 100% respondents of CME FedWatch are expecting a 25 basis-point reduction in interest rate in July. Consequently, the crossed the 27,000 level