Trade Worries, Earnings Optimism Vie For Upper Hand On Wall Street

Wall Street appears to be of two minds. Excitement over another potentially bumper earnings season seems to be competing with international trade worries for influence over the market’s direction.

Today, it seems that the latter has the upper hand as equities futures were pointing to a lower open for all three major U.S. indices after the Trump administration threatened $200 billion in new tariffs on Chinese goods. That’s after both countries slapped $34 billion in tariffs on each other last week.

The escalating business tensions between the world’s two largest economies has had Wall Street on edge for months as investors seem to be worrying about the trade dispute crimping global growth.

The most recent round of trade concerns look to be affecting not just U.S. equities, but markets across the globe. Two of China’s benchmarks, the CSI 300 and the Shanghai Composite, both fell 1.8% overnight. The iShares MSCI Emerging Markets (NYSE:EEM) Index added to its recent weakness, falling nearly 1%.

As trade worries flared up, investments traditionally seen as providing a measure of safety in uncertain times rose. Rising demand for 10-year Treasuries pushed the yield lower. Bond prices and yields move in opposite directions. Meanwhile, the U.S. dollar index, which measures the greenback against a basket of other currencies, also rose. Gold, also considered a haven investment, was lower, but that was likely because of the strength in the greenback, which can dampen demand for dollar-denominated gold.

For those who look to the commodities markets for signs of potential economic strength and weakness, copper (see figure 1 below) has been especially hard hit in recent days. The industrial metal, often seen as an indicator for global economic activity, fell as much as 3.5% since the start of the week.

U.S. stocks finished higher Tuesday, with all three major indices in the green and the S&P 500 (SPX) hitting its highest close since Feb. 1 as optimism about Q2 earnings seemed to help sentiment.

Although it is early going, many analysts have indicated that they are expecting this earnings season to be another strong one, and it appears the market may have had firmer footing on Tuesday in anticipation of that, especially after PepsiCo's (NASDAQ:PEP) strong results.

Earnings season could provide investors with a counterpoint to international trade news, which has weighed on the market due in large part to worry about global economic growth. In this atmosphere, the conference calls accompanying earnings releases could be particularly important for sussing out nuance.

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Consumer staples was the best performing S&P sector on Tuesday with a 1.26% jump. PepsiCo (PEP) was the leader there, with a 4.76% gain as the soft drink and snack food mainstay said it earned an adjusted $1.61 a share in Q2, beating the average Wall Street analyst estimate. Revenue of $16.09 billion rose 2% from a year earlier and also beat forecasts. Snack food sales looked strong, but the company’s core beverage business seemed a bit flat.

Consumer staples may have also got a bit of a bid as investors could have been looking for value. The sector had been down more than 9% year to date through Monday.

Another sector that did well Tuesday was utilities, which is interesting because it marked another sector that, like consumer staples, is often considered defensive yet was up on a day that was generally positive for other sectors too. In fact, of the S&P 500 sectors, only financials were in the red yesterday.

Part of the strength in utilities Tuesday could simply be some bargain hunting after the previous session’s slide. But investors may also be eying the sector for its yields compared to government bonds. With the yield on the 10-year Treasury below 3%, utilities that are offering higher dividend yields can be attractive given that they are also often viewed as relatively safe investments.

FIGURE 1: PAGING DR. COPPER. Trade tensions appear to have taken a toll on the copper market. The metal is often seen as a leading indicator for the global economy, due to its various industrial uses. Data source: CME Group (NASDAQ:CME). Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.