Major U.S. banks unofficially kick off Q2 earnings season in July with Citigroup, JPMorgan Chase and Wells Fargo reporting on July 14.LEONARDO MUNOZ/AFP/Getty Images
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Investors generally have a positive outlook for the stock market in the period leading into each of the four earnings seasons – January, April, July and October. The reason the market tends to rise before earnings seasons is because investors view it as a potential catalyst that moves equities higher.
In other words, investors tend to bid up the stock market before the season gets underway. Although the market is currently in its weaker six-month period from May to October, the S&P 500, on average, has performed well from late June into mid-July over the long term.
The S&P 500 has also performed well historically around the major holidays including U.S. Independence Day, which occurs on July 4. The combination of the holiday effect and the positive trend of the market heading into the second-quarter (Q2) earnings season tends to give it a boost.
In the period from two trading days before the end of June through five trading days after U.S. Independence Day, the S&P 500 has produced an annual average gain of 1 per cent from 1950 to 2022 and has been positive 73 per cent of the time. Over the past three years, the S&P 500 produced gains of 5.5 per cent in 2020, 2.2 per cent in 2021 and 0.9 per cent in 2022.
Although the trade may not work every time, the performance is above average when compared with trading periods that have the same number of trading days averaged throughout the year.
Impact of bank earnings
Major U.S. banks unofficially kick off Q2 earnings season in July with Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. reporting on July 14. If there’s a positive reaction to the bank earnings, this could help the stock market rally extend further into July.
When U.S. banks produce better-than-expected earnings, that helps establish a positive narrative in the stock market, helping the move higher. Given the recent problems with some regional banks, positive earnings from the bigger banks could help to alleviate concerns about the overall sector.
There’s a risk the S&P 500 earnings may not be as strong as expected, which could drive the stock market lower. First-quarter earnings that started to be released in April have so far indicated no growth of S&P 500 companies compared with the same time last year, according to Refinitiv data.
The Q2 earnings are expected to show a 5.7 per cent contraction compared with last year, but they’re also expected to be at the bottom of the earnings cycle with subsequent quarters showing growth.
Any rally in July could fade quickly in August. On a seasonal basis, August and September are the two weakest contiguous months of the year over the long term.
Nevertheless, potential seasonal weakness in August and September doesn’t negate the possibility of a market rally following the strong seasonal trend from late June to mid-July.
Brooke Thackray is research analyst at Horizons ETFs Management (Canada) Inc.
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