Banks On Parade: Bank of America Becomes Latest Big Financial Company To Report

The bank earnings parade continues Tuesday, and this time Bank of America Corp BAC is in the spotlight. Later today, however, focus could shift to Netflix Inc. NFLX as it becomes the first “FAANG” sighting of the season.

At the same time, major indices took on a positive tone early in the day amid what appeared to be more hopes of a U.S. tariff deal with China. That situation remains fluid as every little rumor draws attention. Today the rumors are positive and the market is looking stronger. Tomorrow it could be the opposite. For investors, it might go back to paying attention to earnings and listening for company outlooks.

After some mixed bank results Monday from Citigroup Inc C and Goldman Sachs Group Inc GS, Bank of America kicked off the day by beating third-party consensus earnings per share estimates but coming up just shy in the revenue department. Earnings of $0.70 a share beat the $0.66 average analyst estimate, while revenue of $23 billion was slightly under the $23.33 billion that analysts had expected.

Strength in BAC mostly appeared to come from the retail side. In its press release, BAC said “economic and consumer activity in the U.S. continue to be solid,” and that businesses of every size are borrowing. It called the capital markets environment “challenging,” however. Shares of the company gyrated around unchanged in pre-market trading.

BAC’s positive comments about consumer activity and the U.S. economy offer more evidence of how healthy consumers are in the driver’s seat. You may not consider consumers as the major driving force behind bank earnings, but today they might have been.

The healthy consumer also might have been one factor helping to give Johnson & Johnson JNJ a boost in Q1 as the company beat third-party consensus for both earnings and revenue. Shares rose in pre-market trading.

BAC wasn’t the only big financial firm reporting Tuesday. BlackRock, Inc. BLK also surpassed analysts’ profit expectations while assets under management also climbed. Shares rose nearly 2% in pre-market trading.

The last big bank to report will be Morgan Stanley MS, tomorrow morning. Before that, focus might turn to the Communication Services sector, where Netflix gets ready to share results after the close today. For NFLX, positive economic drivers have likely played a role in its recent performance. Last quarter, the company posted results that beat Street estimates for earnings and subscriber numbers, but fell a bit short on revenue. It offered guidance for Q1 that was more modest than third-party analysts expected.

It’s a busy earnings afternoon, with Netflix, IBM IBM, CSX Corporation CSX, and United Continental Holdings UAL all unveiling their Q1 results after the close. Basically, that could give people a taste of how a bunch of different parts of the economy are coming along, and CEO comments, as they often are, could be worth listening to. NFLX is the first “FAANG” of the season, and it’s limping a little going into reporting day as investors assessed a new streaming threat from Walt Disney Co DIS. More on that below.

Meanwhile, investors are steeling themselves for key data on retail sales and housing later this week, and the next Fed meeting isn’t far away, either, due at the end of the month.

We’re still early in earnings season, but so far companies reporting have been roughly in line with the historic average as far as beating Wall Street’s expectations, FactSet reported.

Financials Lose Ground To Start Week

The takeaway from Monday might be, “it could have been worse.” After all, two big banks reported lower-than-expected Q1 revenue to start the day, and Financials stayed under pressure most of the session. However, major indices charged back to finish well off their lows

Earnings from Goldman Sachs and Citigroup were kind of a mixed picture despite revenue weakness. Both beat analysts’ expectations on earnings per share, but left some analysts wondering if they can find ways to pick up the pace as the year continues. Many face some growth challenges, including the Fed’s low interest rate policy and investors who’ve retreated a bit from trading the markets after last year’s Q4 washout.

GS has made a move toward the consumer banking and is working hard to control costs. C, meanwhile, has been buying back shares and paying dividends to shareholders. The question might be whether this sort of activity can get investors excited about buying the stocks even as some industry fundamentals retreat. That’s something that only can be answered over time.

The Tiger Effect?

On the subject of time, it had been 14 years since Tiger Woods last won the Masters, but his victory over the weekend appeared to quickly have an impact on the athletic apparel sector as shares of Nike Inc NKE and Foot Locker, Inc FL both jumped Monday. That had some analysts talking about a possible “Masters bounce” for the industry.

Another industry getting a bounce Monday was solid waste, where a bunch of stocks ticked higher following the biggest acquisition in a decade for the sector. Waste Management Inc.’s WM announcement that it’s buying Advanced Disposal Services Inc ADSW for $3 billion appeared to help both stocks clean up for their respective shareholders. Sometimes when there’s a big deal announced you see shares of the acquiring company take a dip, but that wasn’t the case Monday with WM, maybe in part because the company said the deal would be immediately accretive to cash flow and adjusted earnings. The deal expands WM’s footprint into certain Midwest states, The Wall Street Journal noted.

Looking down from 30,000 feet, it wasn’t a really dramatic way for markets to start the week. Financials, Real Estate, and Energy were among the biggest market losers Monday, while Consumer Staples and Health Care led. For Health Care, that represented a turn-around after sharp losses last week as uncertainty about health policy swirled. One thing worth noting is how biotech stocks have diverged from other Health Care sub-sectors like insurers so far this year. Biotech has been pretty powerful, but Health Care is at the bottom of the sector leaderboard.

One day is never a trend, but the way things shaped up Monday, it looked like investors moved into more cautious territory after the S&P 500 Index (SPX) climbed above 2900 Friday for the first time since last fall. Today and tomorrow it could be interesting to see if the cyclicals get their game back ahead of the long weekend, as the market is closed Friday for the Good Friday holiday. Volatility, which had been sinking to new lows for the year, dialed back up a bit, but did pull back from early session highs.

If caution was the watchword in stocks Monday, it didn’t seem to extend much into the Treasury market. The 10-year yield was barely lower, ending the day right near 2.55%. This followed remarks early in the day by Chicago Fed President Charles Evans, who said risks “from the downside” currently outweigh “upside” risks. He added he’d be happy to keep rates at their current level until the fall of 2020 if that helps inflation reach a sustainable level.

Evans’ comments didn’t appear to have much influence on the U.S. Dollar Index, which was flat and finished a few points below 97. The dollar has been pretty range-bound recently but hasn’t retreated all that much from the year’s highs. That might be a sign of investors hanging on to something they see as a security blanket as overseas economic growth lags and trade talks continue with no end date in sight.

Figure 1: FIRST FAANG: With Netflix the first FAANG scheduled to report after the close today, here’s a look at how FAANGs have performed since the start of the year. They’re up more than 20%, which is roughly even with the Nasdaq (COMP). However, weakness in NFLX over the last few days along with a brief halt in Apple’s upward progress have pressured FAANGs lately. Data Source: ICEChart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Slicing the Apple: Looking away from earnings for a moment, Apple Inc AAPL shares had a choppy time late last week and again Monday after getting upgraded by one analyst and downgraded by another. One school of thought says it’s good to see AAPL gaining market share in China, but the other theory is that market share gains are coming because AAPL had to cut prices, which could put the squeeze on its margins. AAPL shares briefly climbed above $200 a share Friday and have had a great year so far, but sometimes it feels like $200 could be a mental barrier for the stock. That looked like the case again Monday as shares pulled up just 15 cents short of the big round number. For the FAANGs in general, especially after NFLX’s weak performance Friday and more weakness Monday amid competitive worries, the question remains whether they can regain their mojo. None has gotten back to their old highs.

Tariffs Hit Tokyo: It’s not just the U.S. and Europe’s economies remaining in kind of a holding pattern amid the U.S./China trade battle. Japan is also feeling the impact, Bank of Japan President Haruhiko Kuroda told CNBC in an interview over the weekend. He said Japan’s exporters are feeling some pain from lack of Chinese demand as the tariff negotiations go on. Info tech exports are among the Japanese products seeing  a negative impact, he added. The next BOJ meeting takes place next week, and Kuroda told reporters earlier this month that the BOJ has tools to loosen monetary policy further if needed. Japan’s inflation rate hasn’t hit the BOJ’s 2% target despite years of easing policy, and, as Reuters pointed out, that’s hurting savers in the country who face extremely low interest rates on their bank deposits. Financial institutions there are also under pressure due to the low rates.

Why care about Japan’s economy if you’re a U.S. investor? Well, the U.S. exported $114 billion in goods to Japan in 2017, making the country our fourth-largest trading partner. The main U.S. exports include agricultural products, machinery, aircraft, and optical and medical instruments, according to the U.S. Trade Representative. This might help explain why a resolution to the China tariff situation could have such a wide impact on many industries.

Stream Wars, Episode One: A New Entry: If there's one key takeaway from last week's announcement by The Walt Disney Company that it would be launching its own streaming service, it's that the mantra of iconic former CEO Michael Eisner still rings true today: "Content rules." The big news—namely that the Disney+ service will launch November 12, that the company would be pulling all of its content from streaming giant Netflix, and that its subscription price would undercut the competition, at least initially—sent shares of DIS up 10% and shares of NFLX down 3%. With all the content from its $71 billion asset acquisition from Twenty-First Century Fox, plus its 90-plus years of original content, DIS seems to be changing the rules of engagement regarding video streaming. When one considers that a handful of firms controls the vast majority of media content in the U.S., it's possible that, in the future, we could see media partitioned into a few behind-the-subscription-wall streaming services. This is certainly a trend worth watching.

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