Market Overview

Earnings Countdown Clock Is Operating: Major Banks Start Season Later This Week

Share:
Earnings Countdown Clock Is Operating: Major Banks Start Season Later This Week

There’s quite a bit of excitement and nervousness heading into earnings season, but analysts don’t necessarily expect the kind of robust company financial growth many investors got used to the last couple of years.

FactSet projects a 4.2% year-over-year decline in S&P 500 earnings for Q1. That’s a big contrast to just one quarter ago, when Q4 earnings grew around 15%. Full-year earnings growth was nearly 23% in 2018. Stocks took on a lower tone in pre-market trading Monday after sluggish overnight action in Europe and Asia, while it could be a waiting game much of this week ahead of JPMorgan Chase & Co (NYSE: JPM) and Wells Fargo & Co (NYSE: WFC) kicking off earnings season Friday.

The last quarter with negative earnings growth was way back in Q2 2016, so it’s been a long time since the market faced this situation. Consider keeping in mind all the reasons earnings might fall, including fading support from the 2017 tax cut, tough comparisons to a year ago, a slowing world and U.S. economy, the trade battle with China, and—more specifically for investment banks—a slow and steady rally to start the year without the kind of volatility that often encourages trading volume.

However, the stock market appears to be looking out farther into the year, based on recent strong performance That’s when earnings and economic growth are expected to improve. Whether the positive sentiment can last might be determined partly by what some of the key companies say on their earnings calls and what sort of guidance they share. Consider closely watching certain industries like semiconductors and home builders, because their businesses can often be leading indicators.

Earnings (see more below) don’t really go into full gear until Friday. Before that, there’s some focus today on a group of executives heading to Capitol Hill and what might come out of that, as well as worries about Brexit as that deadline approaches and the U.K. asks for another extension. The market closed at its highs for the year Friday, so to see stocks come under a little pressure this morning isn’t really a huge surprise. It might represent some profit taking.

SPX Nearing All-Time Highs as Payrolls Digested

Last week ended on a positive note, with the S&P 500 Index (SPX) posting its second-straight higher weekly close and the jobs report easing nagging concerns about possible economic slowdown. The new week begins with the SPX within shouting distance of last fall’s all-time closing high near 2930. Materials and Financials were the best-performing sectors of the week, rising 4.3% and 3.3%, respectively. The Energy sector took first place on the leaderboard Friday, but every sector rose.

What the jobs report appeared to show was employment growth reverting up toward the mean after a sharp February skid. At 196,000, March jobs growth was near the three-month average of 180,000, and didn’t seem to hint at any economic problems. The fear going into the report was that February’s data might have hinted at something more serious going on. Now February looks like it might have been an anomaly.

The March number was also near the six-month average of around 192,000, arguably another sign of a healthy economy. If, for instance, jobs growth was only at 120,000 to 130,000, it would just be keeping up with population growth. Anything above arguably shows some muscle.

Though earnings season can sometimes move the markets around with more turbulence, volatility ended the week near recent lows below 12.9 for the VIX. That would seem to indicate many investors and traders not expecting choppiness in the near term. However, keep in mind that recent dips in the VIX have sometimes preceded pressure on stocks, though past isn’t necessarily prologue.

What Low Expectations Might Mean

Getting back to earnings, what might be interesting about this earnings season in contrast to the last seven or eight is that we’re heading into it with people thinking negative thoughts. That could mean if earnings come in even a little better—maybe still down year-over-year but not as deep in the red as pre-earnings expectations—sentiment might get another boost. Remember, upside surprises from reporting companies often have led to better overall earnings performance than expected the last few quarters. We’ll have to wait and see if that’s the case this time.

Another thought: FactSet projects 4.7% revenue growth in Q1 for S&P 500 companies. That’s not outstanding by any means and would be the lowest since Q3 2016, but it’s still solidly in the “mid-single digits,” as companies like to say. Remember, some analysts put a little more emphasis on revenue than earnings, in part because it’s harder for companies to paint the picture they want around revenue. 

If you lose money or revenue doesn’t hit your projections, there’s no way to hide it, and companies (especially in some sectors like Consumer Discretionary) have been punished pretty badly in recent quarters for missing revenue estimates in a relatively strong consumer economy. The point is, some (though not all) analysts expect S&P 500 revenue to grow in Q1, and that might help tell a more positive story than earnings per share.

The key thing to keep in mind is that earnings drive markets. It’s not just the earnings themselves, either. Many investors want to hear what CEO expectations are about trade. That’s probably going to continue to be a big factor, especially for multinational companies with heavy exposure to China. There were more positive comments from the U.S. administration over the weekend about trade talks, but it seems like there could still be a long way to go.

Aside from earnings, this week brings some important data, including February factory orders today followed by consumer and producer prices Wednesday and Thursday.

2019-04-08-chart.jpg

Approaching Highs: As this one-year chart shows, the S&P 500 Index (candlestick) is getting close to last fall’s all-time high, even as VIX (purple line) seems to be settling back toward the lows of last summer. Data Source: S&P Dow Jones Indices, Cboe. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Rate Cut Chances Dip: In the wake of Friday’s strong March payrolls number, President Trump said the Fed has slowed down growth, and he encouraged the Fed to cut rates, which he said would help the economy “take off like a rocket ship.” Ironically, though, the news that 196,000 jobs were created and pay rose 3.2% last month apparently had many investors re-thinking rates, but with less emphasis on possible cuts.

Earlier last week, CME futures had predicted about a 60% chance that rates would fall before the end of the year. A few hours after the report—which seemed to indicate an economy on stronger footing than previously thought—chances of a rate cut fell to near 50%. The benchmark 10-year Treasury yield finished the week near 2.5%, about where it spent much of the week and above recent lows. It might be interesting to see how Fed funds futures continue to price in rate cut chances as we hit earnings season and Q1 GDP estimates start coming in later this month. Meanwhile, chances of the Fed taking a scissors to rates at next month’s meeting are a meager 4%, CME futures indicate.

Gas Pedaling: While lowering rates can sometimes juice the economy, that sort of move might be worrisome when it comes to one item almost every consumer buys regularly: Gasoline. Already this year, U.S. gas prices have risen about 50 cents and are above $3 a gallon in many areas. Crude hit new five-month highs above $63 a barrel on Friday. Some economists wonder if the weak retail sales data seen recently might reflect consumers dipping deeper into their pockets for gas money and  reducing their spending on other items. 

What does this have to do with a potential Fed rate cut? When rates go down, that tends to also weaken the U.S. dollar, and a weaker dollar tends to mean higher crude prices. While the dollar appears to be holding its own so far this year despite falling U.S. borrowing costs, there’s no guarantee that would continue if the Fed starts to hint at a rate cut. Remember the old saying: Be careful what you wish for, because you might get it.

Reconstructing Jobs: Some worries popped up after Friday’s jobs report about what seems like a weak construction and manufacturing jobs picture. Those concerns aren’t necessarily unfounded, and it’s kind of interesting to see that warmer March weather didn’t appear to boost construction hiring. It might be something to keep an eye out for the next report, but it’s probably not anything to lose too much sleep over yet. 

One thing that might have weighed on construction job growth is the slowdown in capital spending by businesses recently. Capital investments such as new facilities can often spark construction activity, but companies don’t seem to be making those investments like they did a few years ago, partly because of trade uncertainty. It’s way too early to draw conclusions, but it’s not out of the question. We’ll have to see what the next few payrolls reports and earnings season tells us.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Posted-In: banking China Jobs Report Payrolls ReportNews Global Markets General

 

Related Articles (JPM + WFC)

View Comments and Join the Discussion!
Fastest Market News Application
You'll Hear It First On Pro
Don't Miss Any Updates!
News Directly in Your Inbox
Subscribe to:
Benzinga Trading Daily
Get pre-market outlook, mid-day update and after-market roundup emails in your inbox.
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Thank You

Thank you for subscribing! If you have any questions feel free to call us at 1-877-440-ZING or email us at vipaccounts@benzinga.com

Consumer Populations Do Not Always Correlate To Frequency Of Cannabis Usage

Yield Curve Normalization Lifts Leveraged Bond ETFs