Rally takes a pause, as earnings come to the fore

Stock markets are a bit lost as we move towards Thursday. Concerns that earnings data is weak for Q1 in Europe and the US, a delay in US and China trade negotiations, and delays to a Ukraine and Russia peace deal are also hurting overall sentiment.

Vix remains stable, which suggests ‘bumpy recovery’ ahead

European stocks are lower on Thursday and are erasing some of the earlier gains from Wednesday. However, the interesting dimension to price action on Thursday is that the Vix is stable. Stocks are experiencing a mild sell off, yet the Vix is below 30, well below the peak reached on 8^th April. This is a sign that the aggressive sell off that we saw impact most risky assets is behind us. This does not mean that individual names are not volatile.

Earnings round up: Kering hit by massive sales loss, which could be tricky to repair

Kering, the luxury house that owns brands including Gucci, is lower by 5.4% today. It is one off the weakest performers on the Eurostoxx 50 on Thursday, along with LVMH, down 1.2%, and chip equipment maker ASML, which is also down by 1%. Obesity drug maker Novo Nordisk is also down nearly 1% and has fallen 7% so far this week after a competitor in the GLP-1 space announced that it had positive trail results from a weight loss drug in pill form, something that Novo has not been able to achieve yet.

These stocks are all falling on the back of internal issues, and if earnings season starts to replace tariffs as the next driver of markets, then the future pace of a recovery could slow substantially.

S&P 500: disappointing earnings season so far

Earnings season has been disappointing so far, the S&P 500’s earnings season has got off to a weaker start than average compared to expectations. The percentage of companies reporting positive earnings surprises and the magnitude of earnings surprises are below average for Q1, according to FactSet.

Europe weighed down by luxury woes

In Europe, luxury stocks are still failing to recover from weakening demand in China and now in the US, while European banks are also facing reduced net interest income from reduced loan demand and from falling ECB interest rates. Kering reported a 25% decline in sales in its Gucci brand, which was worse than expected. The luxury house also owns YSL, Bottega Veneta and Balenciaga. Sales declines were reported in every region, including a 25% decline in Asia Pacific, and by double digits in Europe, North America, and Japan. This suggests that the first half will be tough for luxury brands, which could weigh on the Cac Index.

Kering said that it could protect margins in the US as it still has pricing power in the face of US tariffs. However, the extent of sales declines suggests that this may not be true. Thus, the outlook for Kering and other luxury houses could depend on how generous President Trump is during his tariff negotiations. For now, the luxury sector is in stock market sellers’ sights. LVMH is down 12% YTD, and it is hard to see how this will be reversed any time soon.

Tesla weakens in the pre-market

US equity futures are also pointing lower and some of Wednesday’s top performers are giving back gains. Boeing, who reported better than expected results on Wednesday, is down more than 1% in the pre-market, and Tesla is also lower by nearly 1%.

The lack of a sustained recovery path for stocks, highlights how worried investors are about the twin effects of tariffs and recessions. So far S&P 500 companies have mentioned tariffs on 90% of calls, and recession on 44% of calls. This is a huge shift, and it explains the extent of the selloff in risky assets, and the market’s failure to lead a sustainable recovery. As mentioned above, the Vix is stable on Wednesday, which suggests that the market has been calmed by the more constructive comments from the White House on tariffs. However, until a deal is complete then this could lead to a slow grind lower in risky assets, led by US stocks.

Will China tariff cuts be enough?

The latest reports suggest that the White House could implement reduced tariffs on auto imports. This isn’t boosting the Dax, which is lower by 0.5%, however, BMW, Mercedez Benz and Volkswagen are all higher on Thursday, Stellantis is mostly flat. Reports also suggest that tariffs on Chinese goods could be halved, however, this would still mean that tariffs were above 50% in some cases, which is still extreme. Thus, investors’ hopes for a moderate tariff stance from the White House could be dashed.

Bond markets remain calm as Treasuries continue to recover

Interestingly, although stocks are weaker, ending two days of gains on the S&P 500, Treasury yields are lower, and bonds are rising. Thus, stocks seem to be bucking the trend on Thursday and are not benefitting from the positive tone in the bond market. Earnings are weighing heavily on individual names this week, the latest victim of a poor earnings outlook is Pepsi Co. Its stock price is weaker by 2% in the pre-market. However, we think that we are passed the period when all risk sells off together. The calmness in the bond market could help stocks to eke out a gain later on Thursday.

Durable goods order: an upside surprise in March could give way to future weakness

Elsewhere, US durable goods data is reported this afternoon. We expect this data to bounce for March, in advance of tariffs. The market is expecting a 2% increase, driven by car orders, although excluding transport, durable goods may only rise by 0.3%. This data may give way to weakness in the coming months, as tariffs decimate the auto sector. Thus, even if we get an upside surprise in durable goods data for March, it may not have a long-term impact on market sentiment.

Earnings vs. the White House

For now, earnings reports are vying with White House statements about tariffs as the chief driver of markets right now. Although volatility is falling, it could be a bumpy few weeks for risk assets, as tariff concerns continue to bite and the weakness in the dollar persists. For now, that has not had a big impact on Q1 earnings, but the sharp drop in the buck since the start of April could have a meaningful impact on US companies and global companies that report in USD in Q2 and beyond, especially since dollar weakness looks like a structural issue that may persist for some time.