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Banks a Clear Winner in First Round of Earnings, But Results Look Mixed Overall

Published 04/21/2023, 09:52 AM
Updated 03/09/2019, 08:30 AM

Bulls and bears touch gloves and go to their separate corners at the end of the week before the bell rings to signal another heavy bout of earnings and economic data starting Monday.

The outcome this week looks like a draw, with some rounds inspiring hope for U.S. corporate health and others pushing companies against the ropes. Tesla (NASDAQ:TSLA) (TSLA) was arguably the biggest name to exit earnings with black and blue marks, but the biggest banks held up well overall and even the regional banks—touched by last month’s industry crisis—didn’t end up on the mat.

Major stock indexes continued to trend lower early Friday after Thursday’s poor outing that featured not only TSLA’s disappointing results but also data showing that the economy may be slowing. Most notably, the Conference Board said its Leading Economic Index (LEI), a forward-looking measure of economic conditions, fell 1.2% in March from the month before, leaving it at its lowest level since November 2020.

Data’s a bit sparse today, and the earnings calendar is also somewhat light. The major indexes are on pace for a negative week, and for the moment there just aren’t many obvious catalysts out there to make Friday’s round look pivotal.

Morning rush

  • The (10 Year Treasury Yield slid another basis point to 3.53%.
  • The U.S. Dollar Index ($DXY) is steady at 101.78.
  • The Cboe Volatility Index® (VIX) futures rose to 17.46.
  • WTI Crude Oil (/CL) traded at $77.55 per barrel.

The VIX, also known as the “fear index,” seems to suggest that investors are becoming increasingly bullish despite all the recession talk. This could be a good sign for stocks. However, contrarian investors often see a lower VIX as a sign of investor complacency that often precedes a reversal.

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Just In

Shares of consumer products giant Procter & Gamble Company (NYSE:PG) are on the rise in premarket trading after the company announced positive quarterly results and raised 2023 guidance. Still, in its earnings release, PG notes challenges, calling current conditions “a very difficult cost and operating environment.” It adds that its outlook takes into account “headwinds” that include higher commodities and materials costs.

Regional bank earnings looked strong on Wednesday but not so hot on Thursday, highlighting industry volatility. The crisis last month didn’t affect all regionals equally. Keep in mind, too, that these banks are the lifeblood of many smaller U.S. states, cities, and communities, so their health can’t be overlooked.

Regions Financial (NYSE:RF) (RF) is the latest smaller bank to report this morning, slightly missing analysts’ earnings per share (EPS) estimates. However, revenue met Wall Street’s expectations and deposits remained stable, the company says.

Shares of railroad operator CSX (NASDAQ:CSX) (CSX) are also on the rise today after the company delivered positive earnings. Railroads are often a good barometer of economic demand. In the case of CSX, the company cites service improvements that allowed it to improve merchandise volume.

Eye on the Fed

The probability of a 25-basis-point increase next month was 82% this morning, according to the CME FedWatch Tool. That’s down from 87% yesterday but still, a level that suggests futures traders have penciled in a hike.

This week featured multiple Fed speakers hinting that they’d support another rate increase to fight inflation. However, a couple of recent speeches also referenced chances that a tighter credit market could slow the economy with less help from higher interest rates. Cleveland Fed President Loretta Mester made both points yesterday, Bloomberg reports.

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Stocks in Spotlight

Hundreds of S&P 500® companies line up at the earnings starting gate next week. Big tech takes the pole position with Microsoft (NASDAQ:MSFT) (MSFT), Alphabet (NASDAQ:GOOGL) (GOOGL), and Amazon (NASDAQ:AMZN) (AMZN). Social media is also in the pack as Meta (META) will post next Wednesday. Intel (NASDAQ:INTC) (INTC) and Texas Instruments (NASDAQ:TXN) (TXN) represent the semiconductors.

If analysts are right, it could be a tough outing for info tech. Average earnings per share for the sector could fall 15.1%, according to the latest estimate from research firm FactSet. Many factors are pressuring these companies, including the strong dollar, sluggish demand for semiconductor chips, businesses cutting back on cloud computing, and waning personal computer sales following impressive gains during the pandemic. The thing to watch for isn’t the bad news that we know already, but whether companies hint in their outlooks that there’s hope on the horizon.

Volatility could ramp up next week as big-tech companies report, in part because some of these firms have very high weightings in major indexes. That means a miss on earnings by any of the so-called “mega-caps” could cause more stress on Wall Street like what we saw yesterday when Tesla (TSLA) plummeted.

What to Watch

PMI check: The preliminary U.S. April Manufacturing and Services PMIs from S&P Global are due out after today’s opening bell. Several International markets already reported theirs today as well, with several European economies missing analysts’ expectations on the manufacturing side of the equation. Given recent recession worries, these data may be looked at more carefully.

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Rally stopper? More than six months after the S&P 500 index (SPX) posted what proved to be its 2022 low below 3,500, the index has climbed about 17% from its lows. But not all sectors participated. Notably, financials remain down double-digits. Historically, every six-month point following a major low saw financials up double-digits, according to Schwab’s chief investment strategist Liz Ann Sonders. “Of those 19 prior occurrences, the worst performance by financials was an 18% gain and the best was 128%,” she says.

The old market adage is that it’s hard to have a prolonged market rally without the financials participating. That’s why some improvement in the performance of this sector might be needed to help push major indexes through the resistance channels they’re in now to new 2023 highs.

Data revival: Next week the flow of new economic data will intensify. Key numbers due out include the government’s first estimate of Q1 Gross Domestic Product (GDP), Personal Consumption Expenditures (PCE) prices (a crucial inflation metric watched closely by the Fed), and an updated University of Michigan Consumer Sentiment report.

We’ll examine these in more detail next week, including analysts’ projections for each. Of the three, GDP would normally take center stage; but in this inflationary and rate-sensitive environment, PCE is likely to have the most market impact. By the way, the latest Atlanta Fed GDPNow tool forecast for Q1 GDP is 2.5%. Many Wall Street analysts expect a figure below 2%. In Q4 of 2022, GDP growth was 2.6%, down from 3.2% in Q3.

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The data that did come in this week carried along the softer trend that began last month. This, along with the last day or two of mostly disappointing earnings, might help explain why Treasury yields failed to extend their rally and the major indexes are on track for a losing week.

SPX Daily Chart

CHART OF THE DAY: HEAD BUMP. The trendline down from last summer’s and this February’s highs (red line) for the S&P 500 Index (SPX—candlesticks) is proving very tough to cross for the index. As this chart shows, we’re watching the SPX bump its head against this line for the second time this year. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Locked at hip no more: There’ve been times when WTI crude oil (/CL) prices and the S&P 500 index (SPX) marched in lockstep. Not so much these days. Since early March, dramatic volatility in /CL simply wasn’t reflected in the SPX. Front-month crude futures plunged from $80 per barrel on March 7 to $65 less than two weeks later, then roared back to above $83 by April 12. The SPX also fell in early March, but otherwise hasn’t had any dramatic moves over this stretch and continues to trade in roughly range-bound territory. It’s still worth watching crude prices if you trade stocks, because weakness in the commodity can be a harbinger of slower economic activity. At this point, fears of higher interest rates are another weight on crude.

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Tight housing persists: March marked the second consecutive month in which median existing home prices dropped. It’s a bit of a chimera, however, when you take a deeper look at yesterday’s Existing Home Sales report from the National Association of Realtors. The good news was home prices falling to $375,000. A larger sales slide in western states, where prices are highest, probably had an outsized impact on the overall price figure, so that could spell less relief for buyers in the rest of the country. Home supplies also remain historically tight, which tends to keep prices elevated. A housing market expert told CNBC yesterday that the problem is one of supply rather than demand. Many people want to buy, but few want to sell—especially if they’re sitting on a 3% or lower mortgage rate. What might change things? A rise in unemployment, of all things, might loosen up the housing market, because it could force more people to relocate for work. Incidentally, new weekly jobless claims climbed to 245,000 last week and were the highest since November 2021. Good news if you’re a prospective home buyer?

Healthcare up next: With a slew of healthcare earnings staring down investors next week, now’s a good time to ponder a recent report from BofA Global Research noting that U.S. healthcare spending tripled from 1970 to 2020. One idea BofA suggests could curb costs might be to shift away from fee-for-service healthcare models toward fee-for-value, or “value-based care.” Under this approach, providers receive a fixed, per-person (or “capitated”) payment that covers all healthcare services over a defined period and are held more accountable for high-quality outcomes. Something to perhaps keep in mind ahead of earnings next week from AbbVie (NYSE:ABBV), Eli Lilly (NYSE:LLY), Baxter (NYSE:BAX), and Bristol-Myers Squibb (NYSE:BMY), among others.

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Calendar

April 24: Expected earnings from Coca-Cola (NYSE:KO).

April 25: April Consumer Confidence, March New Home Sales, and expected earnings from 3M (MMM), Dow Chemical (DOW), General Motors (NYSE:GM), Alphabet (GOOGL), Microsoft (MSFT), Halliburton (NYSE:HAL), McDonald’s (MCD), PepsiCo (NASDAQ:PEP), Raytheon (NYSE:RTN) (RTX) United Parcel Service (NYSE:UPS), and Verizon (NYSE:VZ).

April 26: March Durable Orders, and expected earnings from Boeing (NYSE:BA), Meta (META), Boston Scientific (NYSE:BSX), Humana (NYSE:HUM), and Norfolk Southern (NYSE:NSC).

April 27: Q1 Gross Domestic Product (first estimate), March Pending Home Sales, and expected earnings from Amazon (AMZN), AbbVie (ABBV), Altria (NYSE:MO), Baxter (BAX), Bristol-Myers Squibb (BMY), Caterpillar (NYSE:CAT), Eli Lilly (LLY), Honeywell (NASDAQ:HON), Mastercard (NYSE:MA), and Newmont (NEM).

April 28: April Chicago PMI, March PCE Prices, March Personal Income, April University of Michigan Consumer Sentiment-Final, and expected earnings from Aon (NYSE:AON), Chevron (NYSE:CVX), and Exxon Mobil (NYSE:XOM).

Happy trading,

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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