It is one weeks into the earnings season and we have developed an impression that the economy is growing. But there is another crucial factor that will negatively impact the trajectory of the market, the Europe debt issue.
We focus our discussion on financials sector and energy sector, as we are long XLE and short XLF based on our ETF ranking system. There are a couple of high profile earnings reports from these two sectors, JPMorgan Chase last Thursday, Citigroup last Friday, and Halliburton today. The numbers are rosy: all of them beat EPS and revenue expectations. Moreover, both JPMorgan Chase and Citigroup’s business loans grew in the past three months ended in June. And Halliburton eyed surging demand and growing margins. All the facts point to a more active economy and GDP growth, and a higher price level of the stock market.
Nonetheless, banks are still under pressure in an unfriendly macro economic environment. Their stock prices moved lower in face of new unfavorable regulation policies, litigation costs, and low interest rates.
The most critical issue is the Europe debt issue. It is reported this morning that “Debt Anxiety Pushes Financials Down as Bank of America, Goldman Hit Lows”. Although the Europe debt issue is already aged in years, it appeared that there is still no convincing solution. The direction of the stock market will be determined by the outcome of the duel between a growth U.S. economy and a deteriorating Europe debt issue.