Risk-Off Rerun: Banking Concerns, Nerves Ahead Of Microsoft, Alphabet Earnings Bring Pressure

(Tuesday market open)The rubber hits the road for info tech earnings starting later today when Microsoft MSFT and Alphabet GOOGL open their quarterly books.

Meanwhile, major indexes started the day under pressure despite a round of generally better-than-expected earnings news this morning from a variety of companies including McDonald’s MCD, General Motors GM, General Electric GE, and PepsiCo PEP.

Fresh concerns about the health of U.S. banks may be one reason stocks fell in premarket trading. Shares of First Republic Bank FRC tumbled 20% after the company said deposits fell more than 40% in Q1.

Volatility and bonds climbed early Tuesday, suggesting a bit of uneasiness. Still, the pressure on stocks feels like déjà vu, considering the market’s opened slightly lower nearly every day the last two weeks.

Based on companies reporting so far, S&P 500® earnings were on track for a year-over-year decline of 4.7%—better than the pre-earnings season forecast for a 5.1% decline, according to Jeffrey Kleintop, Schwab’s chief global investment strategist. Bank earnings in particular “avoided doomsday scenarios, and it appears the industry turmoil has been largely contained,” he says.

Morning rush

• The 10-year Treasury note yield (TNX) fell nearly 7 basis points to 3.44%, the lowest level in more than a week.
• The U.S. Dollar Index ($DXY) is slightly lower at 101.6.
• The Cboe Volatility Index® (VIX) futures climbed to 17.5.
• WTI Crude Oil (/CL) slipped to $77.97 per barrel.

Just In

Overall, this morning’s earnings news looks solid. Most of the biggest companies beat analysts’ estimates on both the earnings and revenue side. Here are a few highlights:

• McDonald’s: Comparable store sales grew 12.6% through a combination of price hikes and higher volume, the company says. Overall revenues reached $5.9 billion, versus analyst consensus of $5.58 billion. Did the return of Shamrock Shakes help MCD mint money in Q1?
• 3M (MMM): The industrial giant guided for better fiscal 2023 revenue than Wall Street had expected, and beat analysts’ earnings and revenue estimates for Q1.
• General Electric: Shares continued their dizzying climb to new five-year highs early Tuesday after the company’s earnings exceeded estimates. Guidance also climbed as solid aviation demand boosted business.
• General Motors: The automaker delivered what Barron’s calls “blowout” earnings and the stock rose more than 2% in premarket trading. Q1 sales of $40 billion topped the average analyst estimate of $38.6 billion, and the company also raised guidance. The company was second behind Tesla (TSLA) in quarterly electric vehicle deliveries.
• PepsiCo: Shares rose about 1% in premarket trading following an earnings beat for the beverage and snack company, which also raised guidance. This followed strong results from Coca-Cola (KO) yesterday.
• United Parcel Service (UPS): This one was an outlier early Tuesday, with shares down 5%. The company met earnings expectations but slightly lowered revenue guidance, which appeared to hurt shares.
• Verizon (VZ): Subscriber numbers fell and the company missed Wall Street’s revenue estimates. Still, shares only dropped slightly in premarket trading.

One thing to ponder as earnings reports fly is that many large stocks have arguably priced in good news. A few of the firms announcing earnings today, like GE and MCD, approached earnings season with their stocks on an upswing.

Yesterday saw KO beat analyst’s earnings and revenue estimates, only for shares to fall. Why? Investors may have felt the stock price already reflected KO’s positive performance. Other high-flying stocks like Meta (META) and Microsoft (MSFT) might find themselves in the same boat 

Stocks in Spotlight

About one-third of all S&P 500 firms are scheduled to report this week. Big tech leads the way with Microsoft (MSFT) and Alphabet (GOOGL) later today and Amazon (AMZN) on Thursday. Social media is in the pack as Meta (META) posts Wednesday. Intel (INTC) and Texas Instruments (TXN) represent the semiconductors. Chevron (CVX) and Exxon Mobil (XOM) put the energy sector in the driver’s seat later this week.

Tech preview: The tech sector was among the leading S&P 500 gainers in Q1 before losing ground in April ahead of what’s expected to be a tough earnings season. Just seeing the so-called “mega-caps” meet analysts’ expectations could potentially come as a glimmer of relief, but the performance bar remains high considering the lofty valuations across the sector. Any earnings misses might come under scrutiny, and stocks could get punished for poor outlooks, as well.

Average earnings per share (EPS) for the tech sector could fall 15.1%, according to research firm FactSet. It’s under pressure from the strong dollar, sluggish demand for semiconductor chips, businesses cutting back on cloud computing, and slowing personal computer sales.

Microsoft and Alphabet loom: We talked yesterday about how important cloud revenue is for these two companies, and how digital-ad spending trends could influence GOOGL’s quarter and outlook.

Digging a little deeper, growth of MSFT’s Azure cloud platform slowed to 31% in MSFT’s FY Q2, down from 35% in the previous quarter. MSFT said in January it expects Azure growth to slow further in FY Q3. Some analysts are more optimistic than others, but anything with a 3 as a first digit—as in 30% or better—might be seen as a victory. Even high 20s might look relatively strong.

MSFT also could get dinged by industrywide weakness in personal computer sales. This category took off during the pandemic, meaning demand got pulled forward and now has slowed. Fewer PC sales can reduce demand for MSFT’s software.

GOOGL’s Q4 earnings release quoted executives saying they saw “great momentum” in GOOGL’s Cloud, YouTube, and Pixel devices businesses. Keep an eye on the cloud, where Q4 revenue came in shy of Wall Street’s estimates despite 32% year-over-year growth.

Some of the weight on Wall Street this morning could reflect traders evening positions ahead of these critical reports.

Beyond tech: MSFT and GOOGL get a lot of the attention, but let’s not forget some major economic cogs reporting today and tomorrow. Visa (V) and Chipotle (CMG) might provide some insight into consumer spending this afternoon, while Boeing (BA) and Humana (HUM) put industrials and healthcare on center stage tomorrow morning. Listen for any updates from BA on the recent 737 Max manufacturing glitch and whether it causes BA to update financial guidance.

What to Watch

Homes and confidence: March New Home Sales are due shortly after the open today. Analysts expect a seasonally adjusted rate of 630,000, Briefing.com says, down from 640,000 in February. Consumer confidence for April bows at the same time, with consensus at 104.1, down from 104.2 a month earlier. Remember to check one-year inflation expectations in the Conference Board’s report, which were rather high at 6.3% last time out.

Fed check: As of this morning, the probability of a 25-basis-point rate hike in May stood at 89%, according to the CME FedWatch Tool. Chances of a follow-up 25-basis-point increase in June fell to 17%, while there’s an 74% chance of the Fed hiking rates in May and pausing in June, the tool projects.

Trader resource: If you’re an active participant in the market, the Schwab Weekly Trader’s Outlook is a great way to learn about technical factors, valuations, trading trends, and options activity might drive the market in coming days.

CHART OF THE DAY: OFF THE CHARTS. Though Microsoft (MSFT—purple line) and Alphabet (GOOGL—blue line) have had strong starts to 2023 as they report today, they were both outrun by General Electric (GE—candlesticks), which also is on today’s calendar. Data sources: NYSE, Nasdaq. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Roadblock? Tech’s high valuations might make sense if you expect the economy to have a “soft landing” and inflation to ease, an analyst told CNBC yesterday. But if inflation persists and the Fed responds by keeping interest rates higher for longer, the current tech sector valuations might come under a microscope. And since mega-cap techs make up such a heavy weighting in the major indexes, any downturn in their valuations would likely have an outsized impact on the S&P 500 index (SPX), which is now up about 7% year to date, mostly on the back of the mega-caps.

Credit check: We’re still closely following the corporate credit market following last month’s banking crisis that was widely expected to tighten lending standards. For now, things look relatively healthy from a yield perspective, meaning companies aren’t seeing borrowing costs go through the roof. The yield spread for investment-grade bonds (meaning the premium companies pay versus Treasury yields to borrow money) was basically unchanged last week compared with the week before and lower than in early April. For riskier high-yield corporate bonds, the spread versus Treasuries fell by eight basis points last week and 40 basis points over the last month. All this indicates that while a credit “crunch” may be on the way, it isn’t showing up quite yet. That’s generally good news for the corporate world, and for the banks that want to generate borrowing interest from customers.

On the curve: The closely watched yield curve between the 10-year Treasury note (TNX) and the 2-year Treasury note closed rapidly in March but not so much since—a sign, perhaps, that investors are more certain the Fed plans to keep rates near current levels longer. The curve has been inverted (meaning the shorter-term 2-year yield holds a premium to the longer-term 10-year yield), for an extended period, often seen as a harbinger of recession. The spread peaked at 108 basis points in early March but fell to around 63 basis points to start the week. “The yield curve will likely stay inverted as long as the Fed sticks to the ‘hike, hold, and recalibrate’ message,” says Cooper Howard, a director of fixed income strategy at the Schwab Center for Financial Research. “Short-term yields will likely be volatile as they try to digest the message from the Fed. We would not be surprised if the upside in longer-term yields is limited due to a slowdown in economic growth and easing inflation.” The takeaway for investors, he argues, is to stay up in credit quality and extend duration.

Calendar

April 26: March Durable Orders, and expected earnings from Boeing (BA), Meta (META), Boston Scientific (BSX), Humana (HUM), and Norfolk Southern (NSC).

April 27: Q1 Gross Domestic Product (first estimate), March Pending Home Sales, and expected earnings from Amazon (AMZN), AbbVie (ABBV), Altria (MO), Baxter (BAX), Bristol-Myers Squibb (BMY), Caterpillar (CAT), Eli Lilly (LLY), Honeywell (HON), Mastercard (MA), and Newmont (NEM).

April 28: April Chicago PMI, March PCE Prices, March Personal Income, April University of Michigan Consumer Sentiment-Final, and expected earnings from Aon (AON), Chevron (CVX), and Exxon Mobil (XOM).

May 1: March Construction Spending, April ISM Manufacturing Index, and expected earnings from CNA Financial (CNA).

May 2: Start of two-day FOMC meeting, March Factory Orders, March JOLTS Job Openings, and expected earnings from Cummins (CMI), DuPont (DD), Illinois Tool Works (ITW), Marathon Petroleum (MPC), Marriott (MAR), and Pfizer (PFE)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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