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Budget Deal, Earnings Strength From Lockheed, CocaCola, United Technologies Lift Spirits

JJ Kinahan

One thing Wall Street arguably never wants is uncertainty about the U.S. government paying its bills and keeping the lights on in Washington. Some of that worry flickered out on news of a budget deal between the White House and congressional leadership, so that could be helpful as trading gets started today.

Meanwhile, the earnings treadmill rolled on Tuesday, getting an early jolt from The Coca-Cola Co (NYSE: KO) reporting better-than-expected results. Strong sales of its signature beverage helped things along. KO also raised its revenue forecast, something that might be an even better development than strong earnings because it’s forward-looking and says something positive about the economy. 

In other earnings news, United Technologies (NYSE: UTX) beat expectations and lifted guidance, while Travelers Companies Inc (NYSE: TRV) beat on revenue but missed on earnings per share. UTX shares rose 2% and TRV fell about 1% before the opening bell. Lockheed Martin Corporation (NYSE: LMT) shares rallied 2% in pre-market trading after the defense company surpassed analyst estimates on top- and bottom-lines and raised its forecasts for both. 

So far, about 18% of S&P 500 companies have reported Q2 results. Of those, 78.5% have surpassed analyst expectations on the bottom line, while 67% have reported better-than-expected revenues, according to FactSet. Earnings growth is 3.6% so far, but we’re really just getting started. Most analysts expect overall earnings to fall in Q2.

Overseas, things looked solid overnight, and might give U.S. markets some traction. Growing hopes for more economic stimulus when the European Central Bank (ECB) meets this week appear to be helping stocks in Europe. 

There was also some talk about the U.S./China trade situation early this week, with media reporting the chance of face-to-face talks resuming between negotiators. That story goes day-to-day, so maybe consider not getting too up or down about any media reports. Still, people are paying very close attention.

Earnings Tide Rolling In

Monday felt like the calm before the storm as investors geared up for this week’s flood of earnings reports. The rest of the week’s schedule is hyperbolic. Only a few major firms posted results on Monday, but the list grows as the week continues. Today’s action began with LMT, KO, Biogen Inc (NASDAQ: BIIB), and Kimberly-Clark Corp (NYSE: KMB), among many others.

After the bell today, Chipotle Mexican Grill, Inc. (NYSE: CMG) and Visa Inc (NYSE: V) are on the list, followed tomorrow morning by AT&T Inc (NYSE: T), Boeing Co (NYSE: BA), and Caterpillar Inc (NYSE: CAT). The market could be driven by short-term events, as it often is during earnings season, and the hot sector one day might not be so hot the next. If you’re a long-term investor, it could be prudent not to get too caught up in the day-to-day noise.

Some of the trends to consider watching as earnings continue include not just whether companies beat Wall Street’s expectations, but also the quality of their earnings and what executives say about the coming quarters. It’s a judgment call when it comes to “quality” earnings, but if revenue rises from a year earlier and bottom line growth reflects more than one-time events like a tax benefit, that could be a sign.

Expectations among analysts are generally low, so a lot of companies are probably going to beat and get a 9th-place “participation” trophy. If earnings beat but they’re down from a year ago, that’s sometimes a signal that all might not be well despite the headline being positive. It’s important to consider digging a bit deeper at times like these to sound out which companies are truly doing well and which ones only seem to be.

Technology Ignited as Week Begins

One sector where analysts’ expectations are relatively high is Technology, which has been leading the way all year. That didn’t change Monday, with Technology climbing more than 1% to pace all sectors as many of the chip stocks had a great day.

These chip names certainly could be among the hardest hit if the China tariff situation goes south, but even if it does, you could make an argument for the chip sector. We know these products are needed. Gamers, especially, want the fastest chips, so there is demand. Chips appeared to get their latest boost from an analyst upgrade to Micron Technology, Inc. (NASDAQ: MU) and a few other names. The Philadelphia Semiconductor Index rose 2%.

Apple Inc (NASDAQ: AAPL) was another beneficiary of an analyst report Monday as Morgan Stanley (NYSE: MS) raised its price target on the stock. AAPL is up 30% year-to-date, and the upgrade was based on what MS called “improving” iPhone and services data points. MS said it sees “multiple catalysts” beyond earnings for AAPL. We’ll have to wait and see, but it looks like strength in AAPL was another factor aiding Technology early in the week. Apple reports next week and its results often have a big impact on the market. 

Apple is in advanced talks to buy Intel’s smartphone modem-chip business, the Wall Street Journal reported, another step in what could be a major push for internal modem development.

Treasury yields held pretty much steady early Tuesday, with some analysts wondering how long the 10-year Treasury note can hold above 2%. It’s at just below 2.05% now. As some point out, this week’s ECB meeting is widely expected to result in a rate cut or some other type of stimulus, maybe leading to even more negative rates in Europe when they’re already at all-time lows. U.S. interest rates don’t operate in a vacuum, so even if economic data here look supportive, yields could stay under pressure from overseas developments.

There are data this week sprinkled among the dozens of earnings reports, and today brings June existing home sales. New home sales come tomorrow. There’s also the Richmond Fed Manufacturing Index this morning, which might get a closer look than normal because of concerns about business confidence. A two-year Treasury note auction is also on today’s calendar.

Healthy Consumer in Focus

Ironically, the dollar is rising lately despite the looming chance of a rate cut next week. There wasn’t a big move Monday, but the Dollar Index is back near 97.3 after falling well under 97 earlier this summer. This could be a reflection of solid U.S. jobs and retail sales data last month, both of which pointed to potential economic strength. Early results from earnings also seemed to show a healthy U.S. consumer, which isn’t too surprising when you consider how low borrowing costs are and the fact that we’re arguably near full employment.

Geopolitics retreated a bit early in the week, but that doesn’t mean they can’t jump right back in the way they did last Friday. The Iran situation is still fluid, but the lack of a major rally in crude probably speaks to how the world is less dependent on Persian Gulf oil than it used to be, media reports reminded us. That said, U.S. crude production could start easing back a little as producers have been reducing the number of active rigs for some time. Crude prices gave back some ground early Tuesday after some initial gains.

Figure 1: LOST LUSTER: Copper (candlestick) and natural gas (purple line) are among the commodities struggling to find their way in the markets over the last three months. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Gear Up for Boeing Tomorrow: Boeing Co (NYSE: BA) will likely be front and center tomorrow morning as investors gear up for the latest update on the troubled 737 MAX. One thing to consider is that this isn’t just the story of one company. The grounding of the MAX has far-reaching implications. Let’s not forget all the other companies that contribute parts that go into a plane. We might not see an impact from the MAX grounding in this week’s Q2 gross domestic product (GDP) report, but it could end up affecting future GDP numbers and have a wider impact on the economy.

For BA itself, this is looking like a long road. When a company has smoke—whether it’s a Department of Justice investigation, unusual taxes, or product safety—these stories always seem to take longer than you think to resolve. Look at Wells Fargo & Co (NYSE: WFC). They’re three years out from the fake accounts scandal and still getting asked about it on their earnings calls. It still haunts them.

Failure to Thrive: While its cousin gold basked in the headlines last week at six-year highs, copper hid behind the scenes, unable to escape the range-bound trading it’s been locked in since mid-May (See Figure 1 above). Copper might not be the shiniest metal on the block, but many investors watch its progress to get a sense of demand for the industrial metal used in so many technology products. Copper stirred some excitement in mid-2018 when moved above $3 a pound for the first time since 2015. It’s been stuck in the mud since then and recently traded at $2.71, well under the 2019 high of just under $3. That’s about where it was back in 2006 before everyone had a smartphone in their pockets made partly from copper. 

Copper isn’t the only industrial commodity under the weather this year. Natural gas futures fell to their lowest levels since 2016 recently, and crude just hasn’t made much traction above $60 a barrel for U.S. futures. Lumber market action isn’t too solid, either. The bearish takeaway might be that all this points to low industrial demand, but a bullish view would say low prices could make business less costly for companies and maybe spark some growth. Producer prices for industrial commodities have leveled out over the last few months, according to government data.

Steel Yourself: Last week and the week before featured company reports from a few less-closely followed firms that provided insight into wider economic demand. Yesterday’s earnings from Steel Dynamics, Inc. (NASDAQ: STLD) is another one that fits into that mold. The company, with around $12 billion in annual revenue, is one of the largest domestic steel producers and metals recyclers in the U.S. Though its earnings are already out, it might be interesting to tune into this morning’s earnings conference call to get a sense of how executives feel about the fundamental environment looking ahead to Q3 and Q4. Sometimes it’s less about the numbers and more about the feeling you get on the conference call.

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