(Tuesday Market Open) The question today is whether a flurry of strong earnings from banks and other companies can help jumpstart the sagging market. Judging from early action, the answer seems to be affirmative, at least for the moment.
Morgan Stanley (NYSE:MS), Goldman Sachs Group (NYSE:GS), UnitedHealth Group (NYSE:UNH) and Johnson & Johnson (NYSE:JNJ) were among the companies reporting solid results early Tuesday. Better than expected investment banking results at GS helped that company easily beat analysts’ projections for earnings per share and revenue, while MS also posted robust investment banking growth and saw its shares surge in pre-market trading.
JNJ, meanwhile, raised guidance after a positive quarter, and UNH shares jumped 1.5% before the opening bell after the company exceeded analysts’ estimates. The only fly in the corporate ointment early Tuesday might be Walmart (NYSE:WMT), which trimmed its earnings outlook due to its $16 billion acquisition of e-commerce firm Flipkart earlier this year, its largest acquisition ever. However, WMT shares didn’t drop too much, and investors should consider taking the guidance news in context, as it partially reflects the company expanding its business.
Away from corporate news, the market had a good lead-in from Europe Tuesday after indices there moved higher. The bounce from nearly two-year lows for some of the European indices could also help give U.S. stocks a positive injection. The U.S. stock market has been having a tough time recently, but the consumer and the economy overall seem to be doing quite well.
Morgan And Goldman Results Look Solid
Earnings per share at MS hit $1.17, easily topping the $1.02 third-party consensus estimate. Equity trading revenue of $2 billion was up 5%, in line with estimates, while overall investment banking results beat Wall Street analysts’ expectations. The closely watched bond trading figure was roughly flat year-over-year in what’s been a rough environment.
Over at GS, earnings per share of $6.28 easily topped the consensus figure of $5.38. Investment banking rose 10%, also above Wall Street’s estimates, helped in part by strength in initial public offerings (IPOs). Trading revenue was about flat, with equities rising 17% while trading in fixed income, currencies and commodities (FICC) fell 10%.
As with other big banks, the numbers themselves only tell part of the story. It’s also important to listen for what their executives say on earnings calls and to get their sense of how the economy is shaping up. Sometimes the CEOs’ remarks can have as much impact on the market as the earnings data.
With MS and GS out of the way, investors can prepare themselves for this afternoon’s results from Netflix (NASDAQ:NFLX) and International Business Machines (NYSE:IBM). The last time NFLX reported, it missed analyst estimates for subscriber figures, which many analysts pointed at as the primary culprit that sparked some panic selling. Total membership additions were 5.15 million in Q2 2018, missing management’s original forecast for 6.2 million.
For the third quarter, management said it expects to add 5 million subscribers, including 650,000 in the U.S. and 4.35 million in international markets. NFLX could be worth watching this afternoon as the streaming wars continue, probably one of the more interesting aspects of the stock market right now as other companies like Disney (DIS) and AT&T (NYSE:T) also make investments.
IBM, meanwhile, might be worth a look for what executives say about the economy and any impact from U.S. and Chinese tariffs. IBM pulls in a lot of revenue from overseas and operates in many geographies, so it has a front-row seat to some of the trade factors unsettling the markets. Also consider checking on progress in the company’s cloud and technology services businesses, and whether IBM can once again grow revenue after a long stretch of declines that recently ended.
Momentum Check
Monday saw momentum tip back into the negative column after Friday’s brief respite from selling. However, losses weren’t as dramatic as earlier last week, and small-caps actually gained ground. Techs continued to suffer the most.
Nasdaq, which is heavy in tech, once again took the biggest blow Monday. The Dow Jones Industrial Average in contrast, actually spent parts of the day trading higher before being dragged down at the very end of the session.
Treasury yields, whose rally above key levels at 3.15% and 3.2% arguably contributed more than anything else to last week’s sell-off, seem to be stabilizing around 3.15%, and didn’t move too much early this week. Benign inflation data last week and a weaker-than-expected retail sales number on Monday might be easing concerns about possible economic overheating that helped lead to the yield rally.
As yields smooth out a bit, financial stocks once again could be disappointing bulls by not responding to mostly positive earnings numbers from the big banks. Bank of America (NYSE:BAC) became the latest victim, falling sharply Monday despite easily beating Wall Street analysts’ estimates with its Q3 results and posting strong progress in some of its key businesses. Last week, the story was pretty much the same for some of the other big banks.
If the market doesn’t reward positive earnings, that could end up being a bit of red flag for other sectors. We’ve been seeing this movie all year, and it might be a sign that for many investors, it isn’t enough to just beat the estimates.
With banks, it seems like some investors are just picking at the numbers, trying to find any weakness that gives them an excuse to sell. So far this earnings season, slower trading revenue growth seems to be the rub. It’s not too surprising to see trading revenues going less than gangbusters considering volatility was pretty dull in the Q3, but this quarter’s volatility, at least in the first two weeks of Q4, might signal improved trading volume for the banks moving forward. That’s something we won’t learn until Q4 earnings season in January, however.
The weakness in financials yesterday paled next to tech, which fell more than 1.6%. Communication Services, which includes Facebook (NASDAQ:FB) and Netflix (NASDAQ:NFLX), fell nearly 0.5%. Other FAANG names, including Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN), also continue to slide. Chipmakers NVIDIA (NASDAQ:NVDA) and Micron (NASDAQ:MU) took a hit, as well. Meanwhile, so-called “defensive sectors” like utilities and staples continue to top the leaderboard.
Nerves Still Frayed
There’s little doubt the market is nervous, something evident in the VIX staying above 21 early this week, up from below 12 late last month. Many people still seem concerned that higher costs for employees and materials might start compressing profit margins in the coming quarters, and there’s geopolitical turmoil around the world. The trade battle with China might seem like old hat by now, but you can add concern about Saudi Arabia and growing worries about Brexit to the list. One question is whether the controversy around Saudi Arabia might spark an oil rally, though crude stayed pretty steady Monday.
All of this, along with high valuations for some of the tech names, a slowdown in buybacks ahead of earnings season, and rising yields, might help explain the recent weakness. Still, to put things in perspective, a 5% decline in the SPX typically occurs about three times a year, historically, so what we’re seeing is far from unusual. Only about 20% of the time does a 5% drop extend into a correction, which is a 10% drop from highs. Bear market drops of more than 20% are even less common. This doesn’t mean investors shouldn’t be cautious. It just means there’s not necessarily reason to panic.
There’s also some difference between the current situation and the correction seen earlier this year. For one thing, some of the fear in February stemmed from concerns about a weak dollar and rising wages possibly leading to inflation, which isn’t the case now. The dollar index seems to be stabilizing at around 95 the last few days, compared with lows below 89 in early February. Wage growth has been steady, but so far not enough to have most analysts worried about an inflationary spiral. That’s not to say no one is concerned about inflation, but it’s just not the all-consuming worry it was eight months ago.
As the dollar inches back from recent highs above 96, gold seems to be recovering some of its shine. It rose 0.7% Monday to above $1,230 an ounce, the highest since early August but still well below peaks above $1,360 earlier this year.
FIGURE 1: FIGURE 1: FIGURE 1: FAANG Boomerang: This year-to-date chart shows that on occasions when FAANG stocks (candlestick) have retreated (as they are now), volatility (purple line), has spiked. Though the market is broadly lower in the past week, FAANGs arguably have had it the worst, and that might be helping trigger a boomerang effect in the VIX. Data Sources: Nasdaq, S&P Dow Jones. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Fed Minutes Ahead: Tomorrow afternoon brings minutes from the Fed’s September meeting when it raised rates 25 basis points. The minutes might take on even more significance than usual, considering what’s transpired since then, with 10-year Treasury yields spiraling to decade-highs and the stock market getting slapped around. Earlier this month, Fed Chair Jerome Powell indicated that rates might still be a long way from neutral. Those comments seemed to spook some investors, some of whom had previously thought the Fed might be getting more dovish. The minutes might help investors get more of a sense of where the Fed’s feelings actually lie on the hawk-dove scale, or at least where those feelings lay several weeks ago. The debate around reasons to raise rates could also shed some light on factors the Fed is watching. Keep in mind that Fed minutes, even though they’re a few weeks old, have sometimes moved the market on past occasions.
On the Front Lines: While bank earnings remain in the spotlight for now, along with the focus on what their executives say about the economy, it’s arguably other sectors that might have a bigger impact on how investors end up viewing this reporting season. “What matters more is the reaction to the guidance from the industrials and materials companies, which have wider exposure to the elements that have the market on edge about the earnings growth outlook: currency pressures, tariffs, foreign slowdowns, higher costs, and challenging comparisons,” Briefing.com noted recently. IBM (IBM) reports after the close Tuesday, and though it’s a tech company—not an industrial or material—it has the kind of wide exposure Briefing.com is talking about and might be one to consider watching carefully.
Innovation Cycle: Around the turn of the century, technological advances in transportation and communications led to sweeping changes in the way goods and services were bought and sold in this country and throughout the world. One company emerged to lead the charge, essentially innovating its way through the sales process, from the point of sale all the way up the supply chain. Some competitors adapted; others were relegated to the scrap heap.
Is this a spot-on description of Amazon in the early 21st Century? Sure; but it could also describe Sears, Roebuck & Co. in the early 20th Century. As Sears Holdings (NASDAQ:SHLD) enters Chapter 11 bankruptcy, perhaps the final chapter in the former retail giant’s storied history, we should remind ourselves that the market is forward-looking, not backward-looking. A company can ride yesterday’s innovation only so long. Still, at 132 years, it was quite a run.
Disclaimer: TD Ameritrade® commentary for educational purposes only. Past performance does not guarantee future results. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.