Mixed Brew: Pfizer, Merck Earnings Head Opposite Ways, But Uber And Caterpillar Slug Line Drives

(Tuesday market open) The new month starts with stocks tinted red, but this week’s main events are just getting underway.

A rise in Treasury yields might have investors nervous early Tuesday as the 10-year yield popped back above 4% ahead of key U.S. economic data. Last week’s brief move into that territory weighed on Wall Street.

It’s another packed earnings day, featuring Merck MRK, Pfizer PFE, Caterpillar CAT, and Uber UBER this morning before a cup of joe and some chips from Starbucks SBUX and Advanced Micro Devices AMD, respectively, after the close. Results so far today have a mixed tone and include a couple of guidance cuts.

We’re about halfway through Q2 earnings season, and so far 58% of reporting companies have beaten analysts’ estimates on the top line—the lowest beat rate since Q4 2016 if it stays at that level. Eighty percent have beaten on the bottom line. Keep in mind that expectations were low, which accounts for some of the high earnings beat rate.

Investors brace for two important reports just after trading begins today—one on job openings and another on U.S. manufacturing health.

The Russell 2000 (RUT) index of small caps closed above its namesake (just over 2000) on Monday for the first time since early February. Gains in small caps typically reflect investor optimism for the U.S. economy, since small-caps have a higher percentage of sales domestically than their large-cap brethren.

Morning rush

• The 10-year Treasury note yield (TNX) rose 6 basis points to 4.02%.
• The U.S. Dollar Index ($DXY) jumped to 102.36.
• Cboe Volatility Index (VIX) futures rose to 14.24.
• WTI Crude Oil (/CL) eased to $81.29 per barrel.

Just in

As two of the largest pharma companies, Merck and Pfizer sometimes get lumped together—and shares of both have been slumping as COVID-19 sales flag. But the companies went their separate ways this morning after their earnings reports. Pfizer shares headed lower in premarket trading following a miss on sales and a lowered outlook, but Merck stock climbed as the company beat analysts’ estimates. It also reported a narrower-than-expected quarterly loss, with improved cancer drug sales coming to its aid.

Another company slicing its outlook today was JetBlue Airways JBLU, which said rising interest in international travel is “pressuring demand” for domestic travel. It’s “redeploying capacity” to mitigate challenges, and says it now expects a Q3 loss as well as 2023 earnings per share (EPS) well below Wall Street’s estimated range.

This travel trend hints that wealthier U.S. tourists are flying farther afield, causing a divergence in shares of different hotel and airline companies. Marriott MAR, for instance, has a large international presence and enjoyed a solid quarter. But Alaska Airlines ALK, which focuses on domestic travel, delivered worse-than-expected guidance.

Caterpillar also opened the books today, and investors appeared to like what they saw. Shares rose in premarket action as the company reported sales and profits rising across the largest parts of its business. Caterpillar revised Q3 sales guidance to be below Q2 sales, but still expects operating margin for the year to be at the top end of the range.

Uber shares climbed as the company reported a quarterly profit amid solid bookings growth. It beat analysts’ estimates across a bunch of categories including trips, gross bookings, EPS, and deliveries. Still, it missed analysts’ average revenue estimate. That didn’t seem to bother investors this morning, perhaps as they focused on record-high trips and gross bookings. It could say positive things about the economy that people still want to pay premiums for a car ride and food delivery.

Eye on the Fed

Futures trading indicates a 20% probability that the FOMC will raise rates at its September meeting, according to the CME FedWatch Tool. The probability for November is 29%.

Stocks in Spotlight

Chip check: Semiconductor giant Advanced Micro Devices is expected to open its fiscal Q2 books later today after shares flatlined over the last two months. Softness in the stock contrasts with a sharp rally over the same period for the PHLX Semiconductor Index (SOX), which could have some investors shaking their heads.

A weak personal computer market that dampened demand for AMD’s PC and server chips hurt in Q1, and Microsoft’s (MSFT) earnings report last week suggested PCs aren’t out of their slump. However, AMD said in its last quarterly call that it believes Q1 was the bottom for that segment. Today’s report could provide more clarity, as could second-half guidance. Additionally, investors might want to check for any artificial intelligence (AI) developments. Competitor Nvidia NVDA is the leader in that category, but some analysts see an opportunity for AMD.

Starbucks shares are barely changed this year but down substantially from their May peak. A rally into the last earnings report got tossed out with the leftover grounds when Starbucks kept guidance unchanged despite a strong Q1. U.S. and China same-store sales growth are likely Q2 focus points. So is the outlook after some analysts said Starbucks seemed overly conservative last time out.

Apple AAPL and Amazon AMZN report after the close on Thursday, and we’ll preview both tomorrow.

What to Watch

Key data at 10 a.m. ET could potentially move stocks. The reports in focus are the July ISM Manufacturing Index and the June Job Openings and Labor Turnover Survey (JOLTS).  

ISM Manufacturing has been in contraction for several months, and analysts expect it to remain there with consensus at 46.8, up from 46 in June. A reading of 50 or higher implies expansion. The U.S. manufacturing economy has struggled following a pandemic-related surge in goods purchases.

JOLTS is expected at 9.63 million, down from May’s 9.824 million and historic highs above 10 million earlier this year. Even 9.6 million is around 50% higher than in pre-pandemic times. Federal Reserve Chairman Jerome Powell noted last week that job openings remain elevated versus available workers. The Fed would like to see that gap narrow, because too many jobs for too few workers is often a recipe for above-normal wage growth and inflation.

The entire week counts down to July’s Nonfarm Payrolls on Friday morning. Analysts forecast 200,000 new jobs created, down from 209,000 in June, with unemployment unchanged at 3.6%, according to Briefing.com.

CHART OF THE DAY: LONG ROAD BACK. The Russell 2000 (RUT—candlesticks) small-cap index clawed back to close above 2000 again Monday for the first time since February 2. The RUT is now well above its 50-day moving average (blue line), which has served as both technical support and resistance this year. Data source: FTSE Russell. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Just say no: As expected, the Fed’s quarterly Senior Loan Officer Opinion Survey (SLOOS) yesterday showed a tighter picture for potential corporate and personal borrowers. Just over 50% of banks tightened standards for large and medium-sized firms, up from 46% in the prior survey. Lending standards tightened from a year ago across the board, meaning for credit card and mortgage loans as well as business loans, the Fed noted. Also, loan demand fell. “Notably, 4.8% of all respondents reported that they tightened standards considerably,” says Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research. “That’s the highest since the COVID recession (which saw a peak of 15.4%) and just slightly below the peak reached before the 2001 recession.” Tighter standards suggest banks taking a harder line amid high rates and after several banks failed last spring. It’s not a positive sign, especially considering most respondents expect to further tighten standards on all loan categories in the second half. However, it might take pressure off the Fed to use higher rates to tame inflation.

Could transports stall? The Dow Jones Transportation Average ($DJT) surged nearly 7% in July, easily outpacing the S&P 500® Index (SPX) and nearing two-year highs. Strength in airlines and railroads—including last week’s spike in Union Pacific (UNP) following earnings—helped drive gains. Detours may loom however, as crude oil rose 15% in July. Transports eased Monday. Even Union Pacific’s quarter wasn’t all that noteworthy, as the company missed analysts’ estimates and cited inflation and falling consumer demand. Crude prices are a possible challenge for the entire sector, though CME crude oil futures (/CL) bake in lower prices later this year. Airline stocks faltered over the last week, and U.S. trucking firm Yellow Corp. declared bankruptcy Sunday, likely putting thousands of truckers out of work. The question is whether Yellow’s troubles are isolated or a sign of wider issues. Transports are among the more cyclical parts of the market, and their robust performance this year is in sync with signs of U.S. economic improvement. If the sector heads south, it might imply bumps ahead for the economy.

August check-up: The market has climbed a “wall of worry” in 2023, including turmoil in regional banks, weak Chinese growth, and war in Ukraine. Nearly 90% of S&P 500 stocks recently traded above their 50-day moving average—near the 90% threshold that’s historically been key in confirming uptrends—according to Schwab Chief Investment Strategist Liz Ann Sonders and Senior Investment Strategist Kevin Gordon. But most of this reflects multiple expansion, not earnings growth, making some investors wonder whether the rally can last. A recent broadening beyond info tech is healthy, but most sectors remain far behind tech since the October low. Sentiment looks “frothy,” sometimes a bearish sign. None of this means the rally can’t continue. As economist John Maynard Keynes said: “The market can remain irrational longer than you can remain solvent.” Not to imply the rally isn’t rational, but rather to emphasize that trying to “time the market” by picking a top and selling (or picking a bottom and buying) doesn’t typically work, even for experts. Instead, consider rebalancing among sectors, or check your exposure to stocks versus fixed income to keep it in line with your long-term plan.

Calendar

Aug. 2: ADP Employment Change, and expected earnings from DuPont (DD), Kraft Heinz (KHC), Yum Brands (YUM), Clorox (CLX), PayPal (PYPL), and Shopify (SHOP)

Aug. 3: June Factory Orders, July ISM Non-Manufacturing Index, and expected earnings from Amazon (AMZN), Apple (AAPL), Coinbase (COIN), Amgen (AMGN), Alibaba (BABA), Hyatt Hotels (H), and Kellogg (K)

Aug. 4: July Nonfarm Payrolls and expected earnings from Dominion Energy (D), Enbridge (ENB), and Corebridge Financial (CRBG)

Aug. 7: June Consumer Credit and expected earnings from Palantir (PLTR) and BioNTech (BNTX)

Aug. 8: Expected earnings from Eli Lilly (LLY), Fox Corporation (FOXA), UPS (UPS), Lyft (LYFT), Wynn Resorts (WYNN), and AMC Entertainment (AMC)

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

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