As I have noted for the last two weeks, this earnings season carries a special significance. It provides an alternative to the official data on the economy. After a bad week for stocks, the punditry will be asking:

What is the message of the market?

Prior Theme Recap

In my last WTWA I predicted that attention to earnings reports would once again dominate the news. This was an accurate call. Earnings stories, both good and bad, were daily highlights. Our featured chart on dollar weakness as more important than geopolitics was especially accurate. More on earnings in the account of the week below.

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can try it at home.

This Week's Theme

Earnings season has developed a bipolar theme: Strength in some popular momentum names and weakness in stocks sensitive to the dollar. The market has provided a daily verdict on earnings reports. For many there is also an important economic message. Observers are asking:

What is the message of the market?

…and for some… Will the Fed be listening?

The Viewpoints

The earnings message draws several different viewpoints, including some noted last week.

• A weak economy has finally taken a toll on corporate profits, especially in some sectors.
• Stock market leadership has narrowed dramatically. Frank Zorilla illustrates with the chart below. He is open-minded about how this divergence could resolve, including a possible broad rally.

 

 

Stockbee has a very similar take on this important theme, including the potential for a rally.

 

 

• The strong dollar has hurt exports and profit margins of many large companies. It is showing up dramatically in energy stocks.
• Commodity price declines have accompanied the earnings reports, providing a negative feedback loop.
• Commodity prices remain strong on a long-term basis. The current economic risk is exaggerated. Scott Grannis has one of his helpful chart packs, including this “favorite indicator.”

 

As always, I have my own ideas in today's conclusion. But first, let us do our regular update of the last week's news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week's Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.

It is better than expectations.

The Good

There was some good economic news.

The Greek agreement held – at least for now.

Earnings have been solid, measured by the “beat rate.” Bespoke has the story, noting the need to consider revenue and outlook as well.

 

Leading indicators showed strong gains, 0.6% versus expectations of 0.2%. Steven Hansen at GEI has charts, comparisons to other measures and a full discussion.

Existing home sales beat expectations. Bill McBride is not impressed, noting problems with the mix of sales and inventory. There is also less impact on the economy than new home sales. Good news, but perhaps not too significant.

Initial jobless claims set an all-time low on a population-adjusted basis. NDD at the Bonddad Blog has the full story.

Commercial real estate is strong. Scott Grannis analyzes the strength in prices, including this chart:

 

The Bad

 

There was also some negative data last week.

LA port traffic was weak in June.Scott Grannis Calculated Risk).

New home sales disappointed. Calculated Risk describes the miss in the annualized rate, but also notes year-over-year strength of 18.1%. Key question: Did mortgage rates affect the sales rate? It is too soon to tell.

Calculated Risk Ed Yardeni notes the 4% decline including energy and the 1.5% increase without that sector.