Salient to Investors:
George Soros called on Europe to buy Italian and Spanish bonds, warning a failure by leaders meeting on June 28 to produce drastic measures could spell the end of the euro. Wayne Lin at Legg Mason says the EU summit won’t produce anything extraordinary, that Soros’ views are extreme, and expects more volatility.
Europe’s debt crisis is putting pressure on corporate earnings globally with companies cutting forecasts and signaling profits will fall at more companies this year.
The MSCI World Energy Index is down 9.6 percent in 2012, more than any other group, and is up 45 percent since the market bottom in 2009, less than any other industry with earnings tied to economic growth. U.S. energy stocks are at the cheapest levels relative to the Standard & Poor’s 500 Index since 2009. Growing consumption of energy has been met with even bigger gains in supply – U.S. crude inventories are the highest since 1990 and natural gas prices are down 38 percent in 12 months amid a glut spurred by hydraulic fracturing.
Analysts expect S&P 500 companies to report a 1.1 percent average drop in Q2 earnings, down from their estimating a gain last month – would be the first decline in 11 quarters after a 6.2 percent average increase in the Q1.
Tim Ghriskey at Solaris Group says it is very unlikely companies will issue favorable outlooks given Europe and slowing growth in the U.S. and China.
Bears say energy producers, about 10 percent of global stocks, will keep equities from advancing. Bulls say the market will rally when their shares rebound.
Jim Russell at U.S. Bank Wealth Management says the S&P 500 will not make meaningful progress until the energy sector bottoms and begins to move higher Russell says energy stock valuations are cheap but the fundamentals have yet to bottom.