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Wall Street Heads Into Earnings Season on a Downswing

Earnings season for the second quarter has kicked off, with the Dow Jones dumping a 400-point gain from earlier in the day.

MANHATTAN (CN) — As Wall Street prepares for the beginning of earnings season once again, U.S. markets gave up early gains to flatline on Monday. 

The Dow Jones Industrial Average, which was up about 400 points in early trading, gained just 11 points for the day. The S&P 500 and Nasdaq both lost, with the former dropping about 1% while the Nasdaq — the best of the three indices over the past few weeks — falling 2%.

Monday’s market may be an omen of the rest of the week, as earnings for the second quarter are set to start rolling in. On Monday, PepsiCo. released its earnings, which showed the beverage and snack company lost 3% in revenue during Q2 2020, slightly in line with what analysts had predicted.

The company’s beverage unit in North America reported a 7% drop in revenue, driven mostly by restaurants and event spaces closing during the Covid-19 pandemic. 

Pepsi’s juice business has been booming during the pandemic, CEO Ramon Laguarta said during an investors’ call, detailing PepsiCo’s desire to be as nimble as a startup but with the resources of a large multinational company.

“The truth is we’re never satisfied,” Laguarta said, channeling his inner Don Draper, noting that the company will be making adjustments to its processes regardless of whether lockdowns are reinstituted.

Many on Wall Street will be anxiously awaiting earnings reports from large financial institutions, which may serve as a gauge for how badly Corporate America fared during the second quarter.

Banks were able to partially weather the Covid-19 storm during the first quarter and seem to have adequate reserves in place. Additionally, many banks were able to rope in fees from servicing hundreds of billions of dollars in loans to small businesses through the Paycheck Protection Program.

JPMorgan Chase, Citigroup and Wells Fargo are scheduled to release earnings on Tuesday, while Bank of New York Mellon, Goldman Sachs and U.S. Bancorp will announce Q2 earnings on Wednesday. Morgan Stanley and Bank of America are expected to release their earnings on Thursday.

“While we’ve seen equity markets remain fairly resilient in the face of the massive disruption caused by the coronavirus pandemic, the same cannot be said for the banking sector, which has seen its share prices sink this year,” Michael Hewson, chief market analyst at CMC Markets, wrote in a Monday note to investors.

Hewson said analysts will be keen to see if big banks set aside additional reserves after the large spikes in unemployment and second wave of Covid-19 cases. 

While the jury is still out on how badly private enterprise did during the second quarter, the government’s coffers dried up considerably. 

According to the monthly Treasury statement released on Monday by the Bureau of Fiscal Service, the U.S. government brought in $241 billion in revenue during June while spending $1.1 trillion, a record-high $864 billion monthly deficit. The yearly deficit is $2.7 trillion, and the Congressional Budget Office has predicted a $3.7 trillion budget deficit by the year’s end. 

Lawmakers passed trillions of dollars in aid programs to combat the economic fallout from the pandemic and is likely to spend more in a fourth stimulus package later this summer. 

Some economists virtually guarantee Congress will pass some kind of fourth stimulus package and that any further shutdowns will likely be limited to only certain sectors, such as California’s decision on Monday to shutter indoor dining, bars and movie theaters.

“Barring such a major meltdown, I suspect the rally on Wall Street can survive without keeping the bars open,” wrote Tim Duy, an economics professor at the University of Oregon. 

More than half of the new cases reported over the weekend were from North and South America. The United States reported more than 124,000 new cases over the weekend, according to data compiled by Johns Hopkins University.

In total, nearly 13 million people have been infected by Covid-19 worldwide, while about 570,000 have died, according to Johns Hopkins. In the United States, more than 3.3 million people have contracted Covid-19, while nearly 135,000 have died.

“Let me be blunt: Too many countries are heading in the wrong direction,” World Health Organization Director-General Tedros Adhanom Ghebreyesus said during Monday’s daily press briefing. “The virus remains Public Enemy No. 1, but the actions of many governments and people do not reflect this.”

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