Key Day Shapes Up For Trade Talks But Earnings Also In Focus As Disney Results Gleaned

You sometimes hear that sausage-making is a messy process that shouldn’t be watched too closely. The same might be true when it comes to trade negotiations with China. We’re basically watching it unfold right in front of our eyes, and that makes for some choppy, volatile trading.

Those ups and downs seen on Wednesday could possibly continue today, as volatility remains elevated. Major indices start the new day on the defensive again, looking back at a late drop yesterday that erased early gains. After getting an initial spark from President Trump’s upbeat tweet about talks with the Chinese, the market couldn’t maintain its advances into the close. One possibility is that investors might be hesitant to carry long positions into the overnight hours out of fear that news could go the other way.

The latest tweet from Trump, saying China “broke the deal,” appears to be on people’s minds this morning. Stocks fell in Europe and Asia overnight on trade concerns, and today could be a key one as the Chinese delegation arrives in Washington a day before new tariffs are expected to go into place.

If there’s anything positive to consider, it’s arguably that the Cboe Volatility Index (VIX) fell below 20 again late Wednesday after zooming from below 13 to above 20 over the last four sessions. The heightened trade talk risk played right into the VIX rally, but there’s a sense that anything below 20 in the VIX could signal optimism. Any news, positive or negative, out of the talks could potentially swing VIX back higher or lower, along with the stock and Treasury markets. Everyone is walking on eggshells.

VIX climbed back above 21 early Thursday as tensions continued on the tariff front. It wouldn’t be too surprising to see a back-and-forth, thin volume type of trading on Wall Street today  with nobody willing to really commit one way or another until people know more about how the tariff talks turn out.

Scrutinizing Possible Tariff Impact on Consumers

Going into Thursday, there’s a 24-hour deadline for new U.S. tariffs to take effect. If that happens, remember that China isn’t likely to just sit back and take it. Beijing would probably slap new tariffs on U.S. products, and that might have ramifications for Materials sector companies (think about the big agriculture firms), and Info Tech (think about semiconductors).

U.S. import tariffs on Chinese goods could hurt companies like Apple Inc AAPL and Caterpillar Inc CAT that source parts from China, MarketWatch pointed out. The same article estimated that tariff-related costs for a U.S. family could range from several hundred to several thousand dollars a year, depending on what products that family bought. That could act like an extra tax on Americans, pretty much the way higher gas prices sometimes do. Think about how consumer spending sometimes falls when gas prices rise.

Some economists said an all-out trade war with China could also take a slice out of U.S. gross domestic product growth (GDP) after a surprisingly strong 3.2% reading in Q1. The Atlanta Fed’s GDPNow tool is already predicting an anemic 1.7% GDP growth for Q2, but tariffs imposed now probably wouldn’t have an immediate GDP impact.

Disney Among Many “Happy” Earnings Stories

Earnings season continues, though it’s a bit slower this week before picking up again next week (see more below). Walt Disney Company DIS got a boost from its theme parks in the company’s second quarter, helping it beat third-party consensus estimates for earnings per share and revenue. Shares of the company rose slightly in post-market trading before losing some ground.

It’s not too surprising to see pressure on DIS this morning, considering the great run the stock had over the last month. Expectations were high going into earnings, and the company would have had to absolutely hit it out of the park to put much more lift into its shares. As it was, the quarter was pretty good, but movie revenue was a bit soft. Next quarter could be more interesting in the movie business for DIS as excitement builds around Avengers: Endgame, in theaters now.

The DIS beat continues a pattern where 76% of S&P 500 companies have out-performed analysts’ estimates so far this earnings season, up from the five-year average of 72%, according to FactSet. Video-game maker Electronic Arts Inc EA, was another one that exceeded Wall Street’s earnings estimates earlier this week. Remember, though, that the bar for S&P 500 earnings results was set pretty low for the quarter.

Looking at the technical picture, it might be a positive sign that for the second-straight session, the S&P 500 Index (SPX) managed to close Wednesday above its 50-day moving average, which is just below 2860. A slide under that today might have the chance to generate additional selling. On the other hand, the SPX unsuccessfully tested 2900 on Wednesday, and that psychological number could represent technical resistance in the days ahead.

Inflation Reading

Aside from China, there’s not necessarily a lot that might keep people occupied today. The earnings schedule is pretty heavy, but it’s mostly smaller firms. Producer prices for April came out this morning and consumer prices are due tomorrow morning. The Producer Price Index (PPI) rose 0.2%, in line with Wall Street analysts’ expectations, while core PPI rose just 0.1%, below analyst projections. Nothing in the numbers seemed to indicate any building inflation pressure.

Despite the turmoil so far this week, traders appear to be holding firm in their expectations for the Fed to keep rates unchanged in June when it meets again. The CME futures market shows just 7% odds for a rate cut. Chances for a rate decline by year-end remain above 50%, CME futures prices suggest.

Treasury yields could stay in the conversation today as the yield curve has flattened this week. The benchmark 10-year yield did rise slightly to 2.48% by the end of the day Wednesday after falling to as low as 2.43% early on and barely outpacing the three-month yield. That spread might get a close look from investors, especially if it shows signs of inverting again as it did in March. Sometimes an inversion is seen as a sign of looming economic weakness. However, yields might not be able to get much traction to the upside, either, with the German bund yield back in negative territory.

FIGURE 1: CAUTION FLAG: The Treasury market is getting some bids this week amid cautious sentiment around trade talks. This one-month chart shows the 10-year Treasury yield (candlestick), which moves opposite of prices, falling below 2.5% in recent days. Meanwhile, gold (purple line), another product that sometimes sees interest in rough times, has started to move up a little. Data Sources: Cboe, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Revenue Outpacing Earnings: A lot of the focus this earnings season is on falling earnings per share for many S&P 500 companies. Although the average EPS loss is a little less steep than some analysts had feared, there’s no getting around the slight slump many sectors are reporting. Going into this week, five of the 11 S&P 500 sectors were reporting EPS declines year-over-year, with Energy and Info Tech the worst performers of the lot.

On the other hand, nine of the 11 sectors are reporting revenue growth in Q1, FactSet said, led by double-digit gains in Health Care and Communication Services. Overall, revenue growth has slowed from 2018, but it still is generally coming in better than analysts had expected going into earnings season. The fact that companies were able to grow revenue in Q1 even with tough comparisons might be a sign of economic and consumer strength. Info Tech and Energy were also at the bottom of the list on revenue, by the way, with both reporting declines.

Shopping Cart Time: Speaking of earnings, the next wave rolls in next week after a relatively quiet patch for the biggest companies over the last few days. Big-box stores and some other major retailers typically report later in the season, so that puts the focus squarely on retail in the days ahead. Alibaba Group Holding Ltd. BABA, Walmart Inc WMT, and Macy’s Inc M all wait in the wings next week, perhaps providing investors with better insight into consumer trends and into how brick-and-mortar is competing with the web for customer dollars. Retail might dominate the coming weeks, but don’t forget some other key names like Nvidia Corporation NVDA, Deere & Company DE, and Cisco Systems, Inc. CSCO, are all due to report the week of May 13. The report from NVDA might get a particularly close look considering mixed results for semiconductors so far this season and a recent pullback in that sector’s stock values. If this week’s light earnings calendar lulled you to sleep, next week might provide a wake-up call.

Could Crude be the Next Coal?: If you look back 20 years or so, people were worried about “peak oil” production. Now, the worry—at least in the Energy sector—seems more focused on potential peak oil demand. Rapid advances in electric vehicle technology and initiatives to reduce carbon emissions make it hard to predict the future for energy companies, especially the ones most dependent on oil drilling, according to a recent CNN report titled “The Tesla Effect.” While it’s not worth getting carried away and thinking oil demand is about to crater, it can be important for investors in the industry to consider the long-term impact of alternative vehicles and stay on top of the issue. Look at what happened to the coal industry. It might be worth keeping that in the back of your mind and being vigilant, because technology can turn very, very quickly.

The CNN article said it’s very hard to measure where world crude demand might be in 20 years, citing a Barclays report that said that oil demand could range anywhere between 70 million and 130 million barrels per day. That’s either a sharp decline from today’s daily demand of 100 million barrels or a hefty increase. Barclays sees oil demand probably peaking between 2030 and 2035 if countries adhere to their recent low-carbon pledges, CNN reported. However, the peak could arrive as soon as 2025—just six years from now—if the world increases its focus on slashing carbon emissions. The Energy sector has been dragging well behind the broader market over the last three years despite a huge increase in crude prices since the long-term lows posted in early 2016.

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