Moody's Downgrades Hits Banks, But Health Care Glows As Lilly, Novo Nordisk Boosted By Earnings, Data

(Tuesday market open) Several months after the opening salvo, regional banks came back into focus Tuesday morning after Moody’s cut ratings on several of them and warned that more downgrades might be on the way—even for big banks. The entire banking sector is in the red, but this time there doesn’t seem to be any initial flight toward mega-cap tech stocks, which are down, too.

The Moody’s decision emphasized that regional banks aren’t necessarily out of danger amid a sagging commercial real estate market hurt by rising interest rates. Several U.S. banks failed last spring, sending the banking sector into a tailspin and hurting the market overall. More recently, regional bank earnings reflected signs of stability, helping the S&P financials sector recover from its lows.

Not all the news is bad this morning, however. Health care is having a strong start following solid earnings from Eli Lilly LLY. Also, shares of Danish drugmaker Novo Nordisk NVO hit record highs after announcing study results that show its obesity drug reduced the risk of adverse cardiovascular events. Six of the 10 top-performing stocks in premarket trading were in the health sector.

As investors digested the Moody’s news, they appeared to seek perceived safety in U.S. Treasuries and the U.S. dollar, both of which rose this morning. The 10-year Treasury yield dipped back to 4% from recent highs. Volatility edged higher but remained below last week’s peaks.

There’s also Federal Reserve news this morning. Philadelphia Fed President Patrick Harker said that, barring any alarming new data between now and September, “we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work.” Harker isn’t the first Fed speaker lately to sound more dovish, but speakers over the weekend made the case for more hikes.

Morning rush

• The 10-year Treasury note yield (TNX) dropped 7 basis points to 4% after the Moody’s news.
• The U.S. Dollar Index ($DXY) climbed to near recent highs at 102.71.
• Cboe Volatility Index® (VIX) futures came close to last week’s highs at 16.93.
• WTI Crude Oil (/CL) dropped sharply to $79.97 per barrel.

Just in

While regional banks took most of the heat from Moody’s, the ratings firm said it’s watching the entire banking sector. The difficulty for smaller and midsized banks in this environment is the profitability backdrop. Weaker margin expectations mean they could continue to struggle as rates stay restrictive.

Another question is whether the new downgrade puts pressure on the Federal Reserve to at least consider pausing its rate hikes due to their impact on regional banks and the customers those banks serve, including the commercial real estate market.

Investors should keep things in perspective today and not make any quick moves out of emotion. The Moody’s downgrade could actually help higher-quality bank stocks, but it’s important to do your homework before coming to any decisions. Sometimes in situations like this it can be helpful to step back and wait for things to settle.

Stocks in Spotlight

Eli Lilly’s earnings this morning gave the stock a 7% boost in premarket trading. The company raised full-year guidance after beating analysts’ estimates for both earnings per share and revenue, highlighted by sales of its Type 2 diabetes drug Mounjaro, which studies indicate might be promising for weight loss.

Palantir PLTR shares sputtered in premarket trading after the software company slightly exceeded Wall Street’s earning expectations, raised guidance, and announced a $1 billion stock buyback program. The share weakness illustrates a trend this earnings season whereby the market did not reward many companies that met or just beat expectations. It’s also possible investors may have expected more from Palantir—this doesn’t look like a blowout earnings report.

Late for the ball? The “House of Mouse” takes center stage tomorrow afternoon in what’s been a disappointing year for Walt Disney DIS investors. Shares are flat year-to-date versus better-than-25% returns for the SPX.

The plot hasn’t changed much heading into this latest quarterly earnings report. Investors remain concerned about Disney’s mounting losses in its streaming service, lack of box-office sizzle, and challenges in broadcast television, according to Barron’s. Although the theme parks and cruise businesses appear healthier than ever, Disney lost more than $4 billion over the last four quarters in streaming as content costs outpaced subscription revenue.

What to Watch

Two of the most closely watched monthly data points will be released on Thursday and Friday: The July Consumer Price Index (CPI) and the July Producer Price Index (PPI), respectively.

For CPI and core CPI (which strips out food and energy), analysts expect a monthly rise of 0.2% in July, according to Trading Economics. Those are the same amounts as in June, and the June report generally appeared to soothe investors’ inflation fears.

Annual CPI and core CPI are seen rising 3.3% and 4.8%, respectively, in July, versus 3% and 4.8% in June. If these readings come in as expected, it would partly reflect tougher year-over-year comparisons than a month ago, when the comparison was to the worst 2022 inflation gains. Still, a steady 4.8% core rate puts inflation well above the Fed’s 2% goal.

Overnight overseas: China will release inflation data late on Tuesday U.S. time (early Wednesday in Beijing). The worry in China is possible deflation as the country’s COVID-19 recovery continues to falter. Exports from China plunged by 14.5% year-over-year in July to a five-month low amid slowing demand. It was the sharpest decline since February 2020, and imports also fell double-digits. Analysts expect consumer prices in China to drop 0.4% year-over-year and 0.1% month-over-month, according to Trading Economics.

Eye on the Fed

Futures trading indicates a 12.5% probability that the FOMC will raise rates at its September meeting, according to the CME FedWatch Tool. The probability for November is 25%.

Talking technicals: Bulls might be relieved that the SPX didn’t approach 4,450 at its lows yesterday. That level represents a 3% decline from the 2023 closing high posted last Monday and is also near prior highs in mid-June and early July. That said, volume yesterday was well below average, which is sometimes an indication that a rally doesn’t necessarily have a great deal of conviction behind it. Some analysts did note a “buy the dip” trend on downturns. The 20-day moving average of 4,531 is not far above Monday’s SPX close.

Seeking guidance: Earnings season to date has been a mixed bag, write Schwab Chief Investment Strategist Liz Ann Sonders and Senior Investment Strategist Kevin Gordon in their latest commentary. Focus is rapidly shifting to company guidance for the back half of the year, when earnings must step up to the plate to justify the market’s strong run driven by multiple (price-earnings ratio, or P/E) expansion.

CHART OF THE DAY: CALL IT: Though the Nasdaq 100 (NDX-candlesticks) finished up yesterday, it remains below its 20-day moving average (blue line). Pressure from Apple (AAPL) kept the NDX behind rival indexes, as Apple makes up 11% of its weighting. The NDX remains well above its 50-day moving average (red line). Data source: Nasdaq. 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

Energy lapse: While S&P 500 earnings per share are on track for their third consecutive quarterly decline in Q2, it’s important to take numbers into context. Tough comparisons in the energy sector have skewed overall performance as energy earnings are down more than 40% year-over-year. That’s mostly due to lower crude oil prices now versus a year ago. Stripping energy earnings from the mix, S&P 500 earnings per share are actually up about 2% so far in Q2. The last time S&P 500 earnings fell three straight quarters (other than during the pandemic) was in 2015–2016.

Price patrol: Looking ahead to CPI, investors may struggle to glean anything solid. Tougher comparisons versus a year ago could skew the data and potentially make it look worse than it really is. Normally focus would shift toward the month-over-month change. But that could also look elevated considering average U.S. gasoline prices climbed to around $3.80 per gallon in July from $3.55 in June. That leaves core monthly CPI and PPI—which strip away volatile food and energy—as the readings that might provide more clarity. That said, stronger-than-expected July wage growth in last Friday’s Nonfarm Payrolls report suggest core readings could be stronger than previously thought. Still, futures prices don’t indicate a major uptick in chances for a September rate hike. Check back on Fed funds futures after Thursday’s data to see what, if anything, traders learned.

Couldn’t get it right: The U.S. Department of Labor has certainly been consistent with its Nonfarm Payrolls report. Consistent in initially overestimating growth, that is. From January through June, each of the government’s six initial figures for monthly job creation was dialed down in the following report. All told, the Department of Labor has downwardly revised jobs growth by 246,000 from its initial readings, meaning an average pullback of more than 40,000 jobs a month. We don’t know yet how that will play out for the July data showing 187,000 new jobs, but if the trend holds, it might end up computing to 150,000 or less. A St. Louis Federal Reserve study notes that the government tends to initially underestimate jobs growth during economic expansions and overestimate growth during recessions. Could recent underestimates hint at recession? The Atlanta Fed’s GDPNow indicator doesn’t point toward one, estimating a Q3 seasonally adjusted annual rate of Gross Domestic Product (GDP) growth of 3.9%, up from 2.4% in Q2. The tool will be updated later today.

Calendar

Aug. 9: Expected earnings from Walt Disney (DIS).

Aug. 10: July Consumer Price Index (CPI and core CPI and expected earnings from Alibaba (BABA).

Aug. 11: July Producer Price Index (PPI), core PPI, and University of Michigan Preliminary August Consumer Sentiment.

Aug. 14: No major earnings or data expected.

Aug. 15: July Retail Sales, August Empire State Manufacturing, and expected earnings from Cardinal Health (CAH) and Home Depot (HD).

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

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