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McDonald's, GM, and Domino's — What you need to know in markets on Tuesday

Myles Udland
Markets Reporter

During a week in which 189 of the S&P 500’s constituents will report earnings, Tuesday brings investors a variety of heavy-hitters to contend with.

Among notable reports expected Tuesday are McDonald’s (MCD), 3M (MMM), Dunkin’ Brands (DNKN), General Motors (GM), Caterpillar (CAT), AT&T (T), and Chipotle (CMG), among others.

Also reporting earnings will be Domino’s Pizza (PZZA), which Jonathan Maze of Nations Restaurant news noted Monday has reported six straight years of growth in comparable sales — or sales at restaurants open more than a year — and seen comps rise 10% in eight of the last ten quarters.

Since July 1, 2011, shares of Domino’s are up 763%. According to data from Bloomberg, the options market is pricing in a move of 5.3% in the stock coming out of earnings.

On the economic calendar, the May report on home prices from S&P Case-Shiller is due out at 9:00 a.m. ET, while at 10 a.m. ET, The Conference Board’s report on consumer confidence in July is due out.

The Federal Reserve’s latest two-day meeting will also kick-off on Tuesday, with the latest monetary policy statement from the FOMC set for release Wednesday afternoon. No change is expected to be made to the Fed’s existing interest rate policy, which targets a benchmark rate between 1%-1.25%.

Guidance disappointing so far

Through the end of last week, we were about 20% of the way through second quarter earnings season.

By the end of this week, we’ll be more than halfway done with the S&P 500, the benchmark U.S. stock market index.

Data from Bank of America Merrill Lynch circulated Monday showed that so far, earnings season has been pretty good. At least relative to estimates.

“Overall, 68% of companies have beaten on [earnings per share], 75% have beaten on sales and 53% have beaten on both — the highest proportion of top and bottom-line beats at this point of earnings season in over five years,” the firm notes.

But how companies are characterizing the future — and how investors are reacting to earnings in general — paint a lot more of a mixed picture for the market.

Quarter-to-date, BAML finds that the number of companies mentioning the word “better” vs. those saying “worse” or “weaker” is at its lowest ratio since the beginning of 2012.

Mentions of things get better relative to mentions of things getting worse hasn’t been this low in years. (Source: BAML)

The firm adds that the cut to earnings estimates from analysts for the third quarter is the largest we’ve seen for subsequent quarter earnings since the fourth quarter of 2015.

Expectations for the coming quarter are dropping like a rock. (Source: BAML)

And as guidance has disappointed, investors have been selling the news.

Work from Bespoke Investment Group published Monday showed that the average reaction for companies that have beat on earnings is for stocks to rise 0.6% for the full day while companies missing have lost 4.1% on average.

But while companies beating earnings are getting rewarded, there is still not a ton of enthusiasm as the average intraday move for these winners still comes in negative, with stocks lose 0.8% during the day even if they beat earnings.

The chart below shows that both companies that beat and miss on earnings are being punished by investors during the trading day, no matter if the stock gaps up or down (meaning closes above or below where it closed the prior day).

Stocks have been getting sold during the day after earnings, even if they beat estimates. (Source: Bespoke Investment Group)

“For now, based on the action we’ve seen so far, we wouldn’t be aggressively jumping into stocks on their earnings reactions days, regardless of whether they beat or miss,” Bespoke writes.

“From a macro perspective, the ‘sell the news’ action we’re seeing suggests that investors are likely a bit uncomfortable with the market right now. You can definitely read that as a bearish sign, but it’s also indicative of an investor class that is far from complacent and ‘all-in’ on the market.”

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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