Earnings Aren't Enough To Combat US-Iran Aggressions

Despite strong corporate earnings, markets declined on continued U.S.-Iran aggressions.  Oil increased another 2% last week, while growth/momentum stocks had another rough week.  Since the equity market peaked on June 1st, value stocks have out-performed growth stocks by a measure of almost 10-to-1.¹  The lack of performance isn't so much that growth stocks are failing to generate profits, but rather the market is punishing growth stocks for any measure of profitability that it thinks is suspect.  One of the major players involved in the AI build out, Google, posted it's first ever negative cash flow quarter since the company went public, despite beating earnings expectations by more than 3 fold.²  This is causing further distress over whether or not companies with considerable AI build-out debt can pay off such debt in the future.  Tensions between Iran and the U.S. reached a new peak last week with fresh military action amid calls by nations other than the two combatants to renew peace talks.  Instead, military action continued while Sec. of State Marco Rubio stated on Thursday that Iran was "not ready to make a deal."³  This caused markets to sell off on Thursday and oil/gas prices to rise.  Oil is higher by approximately 30% since hostilities renewed at the beginning of this month.⁴  That being said, over the weekend, hostilities ceased while a new round of peace talks takes place.⁵  This is causing oil to trade lower in early hours.  It remains to be seen if this new round of talks will result in something more concrete.  Since equity markets peaked on June 1st, the top 50 stocks in the S&P 500 Index are down more than 6%.⁶  Mag 7 names are down at least 9% over the same time period.  However, the equal-weighted S&P 500 is up more than 2%, meaning that the other stocks are seeing better performance than the top 50, over-concentrated names in the index.6  Analysts' expectations for the remainder of the year are for Mag 7 companies' earnings to slow, while the other 493 companies' earnings in the S&P 500 Index to growth faster.  Sustained growth in the forgotten sectors of the market would be positive as the economic backdrop remains strong.  Initial Jobless Claims made a new low last week not seen in more than two decades.⁷  The New York Fed has revised their estimate of 2nd quarter GDP to be north of 2%.⁸  And, there is very little stress underlying the market.  The St. Louis Fed's Financial Stress Index is well below zero at -0.7 and no where near the positive levels associated with recessions.⁹  In addition, the Chicago Fed's National Financial Conditions Index is also well below zero at -0.55, similarly not near recession levels.¹⁰  A concrete ceasefire between the U.S. and Iran, plus a vote by the Fed to leave rates unchanged this week would help markets improve versus the past few weeks.

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