Stocks struggled on Wednesday with the Dow lagging as the trade war between the U.S. and China heats up.
Late Tuesday, reports said the Trump administration would impose tariffs on an additional $200 billion of Chinese imports.
Markets in Asia fell overnight and the U.S. indexes followed suit, with the Dow losing 0.9% to slide back into red figures for the year, while the S&P 500 lost 0.7%, and the tech-heavy Nasdaq fell by 0.5%.
The price of oil also weighed on stocks Wednesday, with West Texas Intermediate Crude Oil falling about 5% and Brent Crude, the international benchmark, dropping as much as 7%.
On Thursday, investors in the U.S. will get the most important economic data point of the week, and that is the June report on inflation. Consumer prices are expected to have risen 0.2% during the month and 2.9% over the prior year, according to estimates from Bloomberg.
Excluding the cost of food and energy, “core” inflation should rise 2.3% over last year. Matt Luzzetti, an economist at Deutsche Bank, said Wednesday this report should “lend further support to the notion that inflation has returned to the Fed’s target.”
The Federal Reserve is currently targeting 2% inflation.
And on the earnings side, the only S&P 500 company set to report results is Delta Air Lines (DAL). The airline is expected report adjusted earnings per share of $1.72 on revenue of $11.72 billion.
Earnings expectations are huge
Earnings expectations are really high ahead of second-quarter earnings season.
According to Bespoke Investment Group, S&P 500 earnings are set to rise 21.4% over last year in the second quarter, marking another strong period of corporate results on the back of tax cuts passed late last year.
Backing out the impact of tax cuts, corporate profits rose 6.8% over the prior year in the first quarter, giving a more modest assessment of where the business cycle really is. Which is to say things are good, but there is a definite sugar high embedded in the earnings results likely to roll in over the next several weeks.
Another question for investors is that with expectations so high, are markets fated to disappoint?
The answer is probably not.
According to work from Bespoke, periods when there have been strong positive revisions in earnings expectations for the next 12 months correlate positively with earnings beats. Meaning that investors grow more bullish on companies at a time when their forecasts for those companies are also improving.
Of course, this does not mean that we will definitely see earnings top expectations at a high rate in the second quarter. And even strong earnings don’t guarantee good returns for the market.
So although lots of investing wisdom comes down to some axioms about doing the opposite of what the crowd tells you, assuming that rising earnings forecasts must set up for a disappointment is not supported by the data.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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