The hits keep coming. Several major companies reported early Tuesday and beat Wall Street’s estimates, continuing what so far has been a surprisingly solid earnings season if you measure it vs. preseason expectations.
Some of the companies surpassing analysts’ projections today were familiar ones, including The Coca-Cola Co (NYSE: KO), Twitter Inc (NYSE: TWTR), Verizon Communications Inc (NYSE: VZ), United Technologies Corporation (NYSE: UTX), and Procter & Gamble Co (NYSE: PG). Shares of TWTR leaped 7% in pre-market trading after the company posted stronger-than-expected results and added more subscribers than many analysts had guessed. Also, several of the reporting companies raised their guidance, including Verizon and Procter & Gamble. That’s a possible sign that they’re seeing strength in the economy. PG raised its dividend again, another possible reflection of corporate health.
The earnings barrage continues most of this week, with about 30% of S&P 500 companies reporting in just these five days. The earnings season began with low expectations, but so far it’s been a bit better than some people thought and actually appears to have the potential to turn out OK. The fear was this was going to be a disaster from the onset. Tuesday’s statistics continued the trend toward more positive results.
It’s especially nice to see some of the multinationals like KO and PG come in with solid results because it could point to strength beyond just the U.S. and suggest that the strong dollar hasn’t been a barrier to overseas sales.
Through the end of last week, Q1 earnings were down 3.9% year-over-year, FactSet said. That was better than some early estimates, but still the worst earnings performance since Q2 2016. Average revenue growth of 5% is actually a bit better than some analysts had expected. More than three-quarters of companies reporting before this week have beaten estimates. Consider keeping an eye on those overall estimates to see if they start to improve.
More earnings are on the way this afternoon with a menu that features eBay Inc (NASDAQ: EBAY) and Texas Instruments Incorporated (NASDAQ: TXN). The TXN report could give investors one of their first glimpses into the semiconductor sector and how it performed in Q1. Semiconductor shares have been flying high most of the year, and some analysts see these stocks as canaries in the coal mine for tech demand. Also keep in mind that TXN is an Apple Inc. (NASDAQ: AAPL) supplier (see more below).
Tomorrow morning stays busy with AT&T Inc (NYSE: T), Boeing Co (NYSE: BA), Caterpillar Inc (NYSE: CAT), and Biogen Inc (NASDAQ: BIIB). There’s likely to be a lot of emphasis on the trade picture as BA and CAT report, since both companies have a big presence in China. However, BA’s conference call is probably going to be dominated by questions about the troubled 737 MAX program and how it might affect orders for the company’s aircraft.
Checking back on TWTR, the company added 9 million monthly active users in Q1, compared with some analysts’ projections for a decline as TWTR roots out harmful content. Revenue rose 18% year-over-year.
On the data front this morning, new home sales for March are up next. The Briefing.com consensus is for a seasonally adjusted 646,000, down from 667,000 the prior month. Existing home sales for March reported yesterday came in below expectations.
Except for a couple of sectors which we’ll get to in a minute, Monday’s session had kind of a wait and see feel to it. A lot of earnings are about to come down the pike, so many investors might be holding off on taking new positions until they know more.
The sectors that took exception to the overall vanilla flavor of the day Monday were Energy and some retail names in Consumer Staples. Energy jumped more than 2% and it looked like mainly a crude play based on the U.S. announcing the end of sanctions exemptions for importers of Iranian oil. With that news, U.S. crude prices jumped above $65 a barrel to new six-month highs.
While that news seemed to help Energy companies and didn’t appear to have much effect on the rest of the market, it might not be just a one-day story. One of the countries importing crude from Iran is China, and its government lashed out against the Trump administration’s announcement. It might be worth watching to see if the U.S. is ready to actually step up and punish Chinese oil importers if they buy Iranian crude once the sanctions exemptions expire next month. Could this raise friction as the U.S. and China try to finalize a trade deal? We’ll have to wait and see.
Another thing to maybe think about is the impact of higher gas prices on U.S. consumers. Retail sales rose 1.6% in March, but one element of that was a huge monthly rise in gasoline sales as prices rose to levels more than 60 cents a gallon above where they were at the start of 2019. The question is whether higher gas costs might push down consumer spending in other areas.
Tough Start To Week for Retail Stocks
One area that might face some friction from higher gas prices is brick-and-mortar retail, where a handful of companies got punished Monday and the S&P Retail Index fell more than 2%. Shares of Bed, Bath & Beyond Inc (NASDAQ: BBBY), Dillard’s, Inc. (NYSE: DDS), and Urban Outfitters, Inc. (NASDAQ: URBN), all showed up on Wall Street’s discount aisle. For some, there was actual negative news, which in the case of DDS included an analyst downgrade.
For others, it might have been a combination of things, including possible fallout from recently rising Treasury bond yields, which can sometimes make dividend-paying stocks in the Staples sector a little less attractive to some investors. Interestingly, if that’s the case, it might contrast with a recent trend that saw some investors embracing so-called “defensive” sectors due in part to the weakness in bond yields earlier this year.
The benchmark 10-year yield pivoted around 2.58% on Monday, up from lows below 2.4% late last month but still a bit below the 2.7% area where they began 2019. It creeped closer to 2.6% early Tuesday. The closely-watched yield curve steepened Monday, giving 10-year yields a 20-basis point advantage over two-year yields.
Typically, rising yields and a steepening curve often signal investor optimism about the economy. That could also help explain why some of the more cyclical sectors continue to do well. Info Tech, Communication Services, and Energy—all considered cyclicals—led the sector scorecard Monday. On the other end of things, Real Estate, Utilities, and Staples all lost ground.
The sector that came under all kinds of pressure earlier this month was Health Care, and that might continue to be worth keeping an eye on this week. Health Care rose a bit on Monday, but you can’t necessarily rule out more possible weakness on worries about political pressure to bring down drug prices.
One stock bucking the lower Staples trend Monday was Kimberly Clark (KMB), which rose more than 5% after beating Wall Street’s earnings estimates. It looks like KMB might have been able to pass along some higher prices to customers, which has been a challenge for some Staples companies lately.
Figure 1: DISCOUNT BIN: Retail stocks (candlestick) had a rough start to the week and have only risen about 10% so far this year, well below the broader market. Meanwhile, Energy stocks (purple line) got a boost Monday from a crude rally. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
On A Cautious Note: Though this year’s rally has been led mostly by cyclical sectors like Industrials and Info Tech, risk-oriented stock funds—especially low-volatility ones—took in a record $8 billion during Q1, Barron’s reported, citing Morningstar data. Low-volatility funds tend to gravitate toward non-cyclical sectors like Consumer Staples, Real Estate, and Utilities, which according to historic data tend to offer investors a bit more protection when markets sag, though past isn’t necessarily prologue. The recent popularity of these low-volatility funds might reflect investor reaction to soft Treasury yields, which often make dividend-paying stocks appear more enticing as their yields come closer to matching government Treasury yields. However, it’s also kind of interesting to see lots of investor money pouring into what some analysts call “defensive” sectors even as stocks approach record highs. Maybe there’s some caution building as investors wonder just how much farther this rally might go as the S&P 500 Index (SPX) nears record highs.
Apple Watch: The end of a legal dispute between Apple and Qualcomm, Inc. (NASDAQ: QCOM) last week puts the spotlight on Apple suppliers just over a week ahead of AAPL’s earnings report. Shares of QCOM, a company that supplies chips for AAPL devices, got a big boost on the news, but investors might also want to check how some other AAPL suppliers are doing so far this year for possible clues into AAPL’s Q1. From a stock performance perspective alone, there see to be some positive aspects. QCOM isn’t the only AAPL supplier stock on the rise recently.
Shares of semiconductor firm Analog Devices, Inc. (NASDAQ: ADI) are up about one-third so far in 2019, and the firm’s fiscal Q1 revenue hit the high end of its guidance. Shares of Jabil Inc (NYSE: JBL), a company that supplies phone casings for AAPL, are up about 30%. Shares of Texas Instruments, which also supplies a variety of components for iPads and iPhones and reports earnings later today, are also on a roll. All these companies have other fundamental influences besides AAPL, but it seems worth noting that none are being punished for the slowdown in iPhone sales growth. Maybe consider checking TXN later today to see if AAPL gets mentioned on its call, and we’ll preview AAPL’s earnings here early next week.
Value Check: Despite the recent rally toward all-time highs for the S&P 500 Index (SPX) and falling year-over-year earnings per share for many reporting companies in Q1 so far, stock valuations aren’t looking too stretched vs. historic norms. The forward price-to-earnings ratio for the SPX going into this week stood at 16.8, not much above the five-year average of 16.4, according to FactSet. It’s up quite a bit from lows under 15 late last year, but remains below highs above 18 earlier in 2018. One thing that could keep the P/E from rising much more is if Q1 earnings come in better than expected.
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