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Earnings Deluge As Twitter, Ford, 3M Fall While Tesla, Microsoft Rise; Amazon Later

JJ Kinahan

Welcome to the busiest day of earnings season, a day when more than 40 S&P 500 companies—about 8% of the total—open their books to investors. 

You’d think on a day like this the market might show more excitement, but stock futures pointed to a flat to just slightly higher open in the early going. That’s despite strength overnight in Europe and most of Asia, and a solid showing in the post-market hours yesterday from Microsoft Corporation (NASDAQ: MSFT) and Tesla Inc (NASDAQ: TSLA). More on those below.

The nice results out of MSFT and TSLA contrast with Twitter Inc (NYSE: TWTR), whose shares got slammed early Thursday and dropped more than 20% after missing third-party consensus projections on both top-and bottom-lines. This is a stock that had been doing pretty well over the last 18 months or so after being left for dead by many, but the challenge is expanding its user base. With this particular earnings report, revenue guidance wasn’t where many analysts wanted to see it.

Guidance also was an issue today for 3M (MMM), whose shares fell about 1% in pre-market trading. The company beat earnings estimates from the Street, but cut its full-year profit outlook.

While it’s not a trend, and plenty of companies have raised guidance this earnings season, in some ways cuts to outlook are even more important to watch than Q3 results. There’s a lot of worry going into the end of the year as issues like Brexit and China trade keep festering, so how do companies see that playing into their business over the next few months? Guidance can often tell the tale. MMM plays right into this when it said today that, “The macroeconomic environment remains challenging.”

Ford Motor Company (NYSE: F) also cut guidance and mentioned lower volumes in China. Shares slumped nearly 4% in pre-market trading. And Ebay Inc (NASDAQ: EBAY) gave a negative picture going forward, talking about its first quarterly decline in four years. Shares fell 6%. Keep in mind that EBAY’s weak guidance is for the December quarter, normally a strong one with the holiday season.

Almost lost in the shuffle in this crazy earnings schedule was the European Central Bank (ECB) leaving rates unchanged. ECB leader Mario Draghi is holding his final press conference this morning before handing over the reins.

Looking ahead to the data calendar today, new home sales top the list of key reports. Tomorrow morning brings October University of Michigan sentiment.

Low-Key Wednesday—Until Tesla and Microsoft

Wednesday looked like a repeat of Tuesday but with different end results. After flopping around on both sides of unchanged much of the day, just like the day before, the S&P 500 Index ended with a brief flourish of buying instead of selling. The light rally to finish the day didn’t exactly look like a smash hit, and the choppy action in general might have reflected the day’s mixed earnings picture.

Energy, Health Care, Communications Services, and Materials topped the daily leaderboard on Wednesday, but none rose as much as 1%. Industrials and Consumer Discretionary brought up the rear, but without a lot of conviction to the downside. Except for a sell-off in chip stocks following weak results from Texas Instruments Incorporated (NASDAQ: TXN) (see more below), it wasn’t really a day packed with market action even as Boeing Co (NYSE: BA) and Caterpillar Inc (NYSE: CAT) earnings failed to meet Wall Street’s expectations.

Maybe the energy could pick up today as investors digest results from some of the big Industrial firms reporting this morning, including 3M Co (NYSE: MMM) and Raytheon Company (NYSE: RTN). There’s also Amazon.com, Inc. (NASDAQ: AMZN) and Visa Inc (NYSE: V) to look ahead to this afternoon (see more below).

The biggest company by far opening its books yesterday after the close was Microsoft, and it delivered better than expected top- and bottom-line results. Sales for all three of its main product lines surpassed guidance, and that’s the whole story right there. The cloud computing business helped drive strong overall numbers.

Some analysts might be focusing on another sequential drop in the company’s Azure cloud platform growth to 59% year-over-year from 64% the previous quarter, but Azure is probably just suffering from the rule of big numbers that says you can’t grow at 100% or even 60% forever. 

More importantly, it looks like Azure might be continuing to gain in market share vs. its bigger competitor, Amazon Web Services, some analysts said after MSFT reported. Overall Intelligent Cloud revenue, which includes Azure, beat third-party consensus estimates in MSFT’s fiscal Q1, but the More Personal Computing segment came up just short. Shares didn’t seem to respond much to the numbers in post-market trading Wednesday, but climbed more than 1% before Thursday’s opening bell.

The big share move instead came soon after MSFT’s results when Tesla stock jumped 17% in pre-market trading. This followed a surprise earnings beat and word from the company that its Shanghai plant was ahead of schedule. It appeared investors were willing, at least early on, to overlook TSLA coming up short vs. consensus revenue estimates. What stands out is TSLA saying its gross margin strengthened, even amid Wall Street worries about the risk of lower-margin cars. The question is whether this is something the company can keep building on.

Earlier this month, the car maker said it had record deliveries of approximately 97,000 vehicles in Q3, apparently exciting investors enough to move the stock from a low of around $230 this month to above $250 despite the figure on deliveries—arguably the single biggest metric watched by investors—being short of analysts’ estimates. 

No Sign of Return to Summer Caution, But Catalysts Lacking for Rally

Though the stock market hasn’t been able to really spread its wings so far this week and the S&P 500 (SPX) has had trouble closing above 3000 on back-to-back days, there’s not a huge amount of caution. If you look at bonds, for instance, the 10-year Treasury note remained near 1.75% on Wednesday, way above recent lows. Also, the yield curve isn’t as narrow as it was a month or two ago, with the 10-year yield solidly ahead of the two-year and three-month yields. This might partially reflect Fed buying in the short-term Treasury market that’s helping keep yields there from popping.

Earlier this year, yields inverted as investors seemed nervous about trade, Brexit, and slowing global economic growth. None of these factors have really gone away, and how Brexit turns out is still as cloudy as London in November. Still, investors don’t seem inclined to crawl back into their shells or repeat the fierce sell-off of last year’s Q4.

At the same time, there doesn’t seem to be much zeal for a big rally. The SPX is at the top of its long-term range, but hasn’t made a new high since late July. It’s unclear what kind of catalyst it might take to break out of this back-and-forth between 2800 and just over 3000 that the SPX has been stuck in since basically early June. 

Next month features a meeting between U.S. and Chinese presidents where there’s hope of the two sides signing some sort of first-phase trade deal. Maybe that’s what we need for another stab at fresh highs, but without any proof it’s going to happen, it doesn’t feel like people are in a big rush to take the long side. 


FIGURE 1: POTENTIALLY POSITIVE: It’s probably too early to get excited, but the dollar index ($DXY-candlestick) is now at its lowest levels since late August after steadily churning higher in September and early October. Many companies have been citing currency challenges in Q3 earnings reports, and hopes for a weaker dollar might start to help Q4 estimates if this trend continues. The level to watch is arguably 97, which the index hasn’t fallen below since late July and which concurred with all-time highs for stocks. Data Source: ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Housing Rehash: Yesterday in this space we talked a lot about the recent housing numbers and previewed today’s new home sales report. So why open the door to this topic again? Mainly because there’s some behind-the-numbers information that provides a higher-level view than the monthly new home and existing home sales. Namely, the National Association of Home Builders reported last week that builder sentiment in October reached its highest level since February 2018. In the wake of that data, analysts at Bespoke Investment Group wrote, “With homebuilder sentiment so strong, it’s hard to imagine that the economy is on the cusp of a downturn.”

Another nuance in the disappointing September housing starts and building permits data that kind of went unnoticed is that the weakness was mainly in multi-family units, not single-family, CNN noted. Also, the most recent Fed Beige Book regional report shows housing looks healthy in most parts of the country. Arguably, there’s no better sentiment than people willing to make 30-year commitments for a home. When people have jobs, they're willing to spend money. The solid housing market is one side effect of a great job market. 

Awaiting AMZN After the Bell: After years of being the poster child for FAANG stocks’ huge market gains, Amazon shares are kind of limping into earnings this afternoon. The stock is up just 5.5% over the last year, trailing the 13% gain for the S&P 500 Index (SPX) over that time. AMZN is also down 13% from its mid-July 2019 high above $2,020.

It may seem hard to feel sorry for AMZN investors considering how quickly the stock scurried from $1,000 to $2,000 in a little over a year between mid-2017 and mid-2018, but now it seems like people want to see whether the company can continue to grow earnings even as it promises one-day delivery on more items and cloud growth slows sequentially. Some analysts say the one-day delivery and free shipping recently introduced for Prime customers could ultimately bolster revenue growth, but the infrastructure to get this in place could be costly. It wouldn’t be surprising if those costs are a topic of the company’s earnings call. 

Chips Turn Red: It’s easy to look at the nearly 2% decline yesterday in semiconductors and decide it was a bad day overall for Technology, but that just isn’t the case. The chip sector looks like it was singing from its own choir book Wednesday, as the overall Technology sector actually rose slightly amid strong gains from Apple Inc. (NASDAQ: AAPL) and Microsoft. When you break it down into sub-sectors, software had a very strong day, and IT services looked solid, too.

Disappointing earnings from chip stalwart Texas Instruments, the fourth-largest and most diversified semiconductor firm, probably played a big role in the chip story. The company mainly cited macro issues for its weak outlook. It’s also possible that with semiconductors up nearly 30% so far this year and outpacing the S&P 500 (SPX) by about 10 percentage points, some people decided it was time to take profit. Traders might be getting a little skittish with Intel Corporation (NASDAQ: INTC) reporting today and Advanced Micro Devices, Inc. (NASDAQ: AMD) reporting early next week. If nothing else, the TXN results might have put some fear into a sector that’s been riding high. One potential counterpoint to that: If AAPL is doing better on hardware sales—as some analysts say—that could be a good sign for chip demand. That means AAPL’s earnings report next week might be one to consider watching if you’re investing in any of the semiconductor firms.

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