Apple Results, Fed Decision, Jobs Report In Focus; Merck, Pfizer Reports Mixed

The market got a checkup with Big Pharma earnings in focus as corporate reporting season rolls on. But trading was quiet as investors appear to be waiting for results from Apple Inc. AAPL and looking toward a Fed decision and a big jobs report later in the week.

Many European and Asian markets were closed, contributing to the subdued mood. The Federal Reserve begins a two-day meeting today, and the market is widely expecting the central bank to announce on Wednesday that it is leaving rates unchanged. Investors are likely to be watching the central bank for any hints of a rate hike at its next meetings in June and beyond. At this point, futures markets are pointing to a near certainty of at least one rate hike between now and June 13. Ahead of the Fed release, the US Dollar Index crossed above 92 for the first time since last December.

Meanwhile, the U.S. nonfarm payrolls report on Friday. Crude and gold futures were down as the U.S. dollar moved higher. Oil may also be experiencing some pressure from data showing higher U.S. production.

Tuesday morning before the bell saw mixed results in earnings reports from healthcare giants Merck & Co., Inc. MRK and Pfizer Inc. PFE. 

Earnings: Pharma and FAANG

MRK reported better-than-expected earnings but a miss on revenue. The pharmaceutical company raised its guidance for full year revenue but lowered its 2018 earnings expectations. For its most recent quarter, MRK reported adjusted earnings per share of $1.05 and revenue of $10.04 billion. The company had been expected to report adjusted EPS of $0.99 on revenue of $10.1 billion, according to third-party consensus estimates.

PFE also missed analysts’ revenue projections, coming in at $12.91 billion when Wall Street had projected $13.1 billion. However, the company did beat on the earnings side of the ledger with $0.77 cents a share, coming in four cents above expectations. The company reaffirmed its existing guidance. In its press release, the company touted its pipeline of potential new products, something for investors to keep an eye on in the future. PFE has quite a few drugs in trials, including several cancer treatments.

The last piece of the FAANG—Facebook, Inc. FB, Apple, Amazon.com, Inc. AMZN, Netflix, Inc. NFLX and Alphabet Inc. GOOG GOOGL Google—earnings puzzle is expected to fall into place after the close today as Apple is scheduled to report its fiscal second quarter results. AAPL is expected to report adjusted EPS of $2.69 on revenue of $61.1 billion, according to third-party consensus estimates. Because Apple is widely held among fund managers and retail investors, it could set the mood for trading. But unless the company has a truly blowout quarter, even beating expectations might not lead to much buying, as we’ve seen with other companies because of high expectations this earning season. A miss by Apple would likely be viewed as a bearish event.

M&A Activity Picking Up

All the major U.S. indices finished lower Monday, with the S&P 500 Index (SPX) led down by the telecommunication services sector. Sprint (S) was the biggest loser there as investors were apparently worried that its deal with T-Mobile (TMUS) won’t pass regulatory scrutiny. TMUS shares were also lower. While there will likely be objectors among regulators, it may be worth keeping in mind that it appears there are fewer regulatory hurdles this time around than when the companies have tried to merge in the past.

Meanwhile, the energy sector was only down 0.04%, making it the best performing S&P 500 sector Monday on help from higher oil prices and merger news. AndeavorANDV was by far the biggest gainer, rising more than 13% on news that Marathon Petroleum (MRO) plans to buy it.  Crude rose on worries about supply from Iran.

Yellow Metal Breakdown

Growth vs. Value

Crude Inventories

FIGURE 1: NO INFLATION WORRIES HERE? As the yield on the 10-year treasury (purple line) touched 3% and then backed up slightly in recent sessions, gold eased off considerably, down about $60 an ounce over the past two weeks. Gold, seen by many as an inflation hedge, appears to reflect muted inflation expectations (see below).  Data source: CME Group, Cboe Global Markets. Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Amid all this talk last week about the 10-year yield touching 3% and a possible return of inflation, one has to wonder: did someone forget to tell the gold market? The yellow metal has dropped as much as $60 an ounce over the last few weeks, even as the 10-year yield rose to multi-year highs (see figure 1 above). Might this mean inflation fears are overblown at this point? Or is the break in gold more of a reflection of the easing of geopolitical tensions? A return to the low $1300s puts gold back to the middle of its 52-week range. However, going back a couple more years, one could argue the  "midpoint" has been rising, so perhaps, despite the recent selloff, gold has reflected a higher level of inflation risk over the longer term. 

It appears there may be a shift toward value stocks happening in the market right now. According to investment research firm CFRA, the S&P 500 Value Index outperformed the S&P 500 Growth Index last week, potentially pointing to a late-cycle market rotation from growth to value. But it's  interesting to note that the growth group has beaten the overall S&P 500 more frequently than the value group when it comes to price returns six months before, during and after bear markets and corrections since 1980, CFRA said. And the growth group has had a better compound annual growth rate than the value group since 1975, although the growth group saw a near 30% increase in volatility, the research firm said.

Later this week, we’ll get another peek at crude inventories. It might be worth paying attention given that the U.S. oil price is near $70 a barrel. Despite robust U.S. production, oil has been on the rise amid growth in global demand, cutbacks in OPEC production and tension over the Iran nuclear deal and sanctions. Rising oil prices have also factored into expectations for higher inflation. Last month, inventory reports moved prices, and future surprises could pressure to the upside or downside. If oil makes a sustained push above $70, we could see more upside pressure from airline hedging.

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