Market Overview

After State Of the Union, Focus Turns Again To Earnings News, Geopolitics, Fed

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After State Of the Union, Focus Turns Again To Earnings News, Geopolitics, Fed

Last night’s State of the Union didn’t really move the needle much on subjects near and dear to many investors’ hearts—stuff like trade and a possible second government shutdown—so now it’s back to watching earnings and the Fed.

Speaking of which, Fed Chair Jerome Powell speaks tonight. He’s giving opening remarks, anyway, and taking questions on monetary policy from teachers. It doesn’t really sound like a potentially market-moving event, but might be worth a look.

Some of the key earnings to consider monitoring today include 21st Century Fox (NASDAQ: FOXA), Eli Lilly And Co (NYSE: LLY), Chipotle Mexican Grill, Inc. (NYSE: CMG), and General Motors Company (NYSE: GM). Then investors can wait for Twitter Inc (NYSE: TWTR) and Philip Morris International Inc. (NYSE: PM), among many others, on Thursday.

Major U.S. indices had a mixed to slightly weaker tone in the early hours Wednesday. The S&P 500 (SPX) is on quite a roll, rising each of the last five sessions. Along with that, the Dow Jones Industrial Average ($DJI) has a six-week win streak going. Better than expected earnings seem to be driving the action on Wall Street, but earnings season is winding down and geopolitics might come back into the picture more as the month continues.

In the speech last night, President Trump didn’t say much of anything new to raise investors' hopes of getting a trade deal with China anytime soon. Nor did it sound like a compromise might be in the works on border wall funding that might prevent another shutdown. So, from a geopolitical view, the market is in pretty much the same place as 24 hours ago with the same issues unresolved. More negotiations between the U.S. and China are expected to take place next week, according to media reports, but February is a short month and that March 1 deadline for new tariffs is approaching fast. Markets in parts of Southeast Asia and in China are closed today for the Chinese New Year.

Early Wednesday, Treasury Secretary Mnuchin made some comments on China calling recent talks “productive” and confirming he’s heading there next week, media outlets reported. This seemed to give major indices a bit of a boost in pre-market trading.

Snap, Disney Lead Earnings Highlights Tuesday

Getting back to earnings, there were some more of those after the closing bell Tuesday, and Snap (SNAP) helped lead the charge. The company reported a loss, but it was narrower than the third-party consensus had forecast. Daily active users also came in above Wall Street analysts’ expectations. Shares surged more than 20% in pre-market trading. 

Walt Disney Co (NYSE: DIS) shares also rose, but not as much, after the company’s FY 2019 Q1 earnings exceeded analysts’ forecasts. Revenue also was above expectations despite a 27% year-over-year drop in the Studio Entertainment segment. This wasn’t unexpected, as the company noted it had a series of hit movies in the same quarter a year ago.

Revenue climbed in the Media Networks and theme parks businesses, DIS said. The company is also working on its Disney Plus streaming service to compete with the likes of Netflix, Inc. (NASDAQ: NFLX), saying in its press release that “building a robust direct-to-consumer business is our top priority.”

In earnings news early Wednesday, LLY shares were lower after the company’s earnings per share came up short of third-party consensus and its guidance looked a bit light compared with analysts’ projections.

The S&P 500 Index (SPX) came within a whisker of its 200-day moving average at the end of the day Tuesday. That mark sits now at 2741, and the SPX was last above the 200-day back in early December (see chart). At this point, the moving average seems to be a possible resistance point, and it might be interesting to see if the SPX can move above it and stay above it for a while. If that happens, some analysts might see that as a bullish development, but we’ll have to wait and see.

Some of the sectors leading market gains Tuesday included consumer discretionary, information technology, and communication services. Financials and health care were the weak links. The 10-year U.S. Treasury yield continues to languish, closing near 2.7% on Tuesday. That might be playing into some of the weakness in financials. 

However, the dollar index gained a bit of ground, climbing back above 96 for the first time in about two weeks. That might remain a metric to watch, because a rising dollar tends to weigh on commodity prices and also can hurt shares of multinational companies. The dollar index spent a lot of time above 97 back in December and arguably was one of many things contributing to stock market weakness then.

Surprising China Strength Seen in Retailer Results

We’re not far from the traditional second act of earnings season, when many retailers start reporting.

Investors got a taste of that Tuesday with Ralph Lauren Corp (NYSE: RL) and Estee Lauder Companies Inc (NYSE: EL) earnings. They appeared to like what they heard, at least judging by share price reaction. It’s possible that these results could raise expectations as more retail earnings start showing up in the display windows in coming weeks, and also could mitigate some fears about the consumer discretionary sector.

What really stood out about both RL and EL were what EL called “solid results” in the Asia-Pacific region. That might sound surprising, considering all the news we’ve heard lately about sluggish Chinese growth and a Japanese economy that seems stuck in place. RL saw double-digit Asian growth.

With RL, at least, the strength in Asia may be a sign that the high-end Chinese consumer who shops at a store like RL is doing pretty well even as middle-class people struggle.

The China news wasn’t as good for another reporting company Tuesday, as Archer Daniels Midland Co (NYSE: ADM) noted “extremely small” soybean exports to the Asian country. ADM’s origination sales—which have to do with buying, storing and selling agricultural commodities—fell about 8% year over year. Even as EL and RL posted 11% and 8% gains, respectively, shares of ADM slid nearly 6% to place them among the day’s worst performers.

It’s days like that—with China apparently helping shares from one sector but playing into weakness in another—that help demonstrate how the China picture is becoming more muddled over time. Trade with China is also arguably staying front and center from a geopolitical standpoint, as some of the U.S. rally Tuesday appeared to be predicated on many investors hoping for signs of progress in the president’s Tuesday night State of the Union address.

2019-02-06-chart.jpg

Figure 1: Back In View: This 3-month S&P 500 Index (SPX) chart shows the SPX once again approaching its 200-day moving average (blue line), a level it last was above back in early December. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

About Those Valuations? Up But Still Near Historic Average: One closely watched market indicator other than VIX could also be back in the news due in part to the recent rally. Valuations, which dipped below historic averages as the market swooned in late 2018, are in some respects back to normal or even a bit above normal. The SPX went into this week with a forward price-to-earnings ratio of 15.7, according to FactSet. That’s slightly below the five-year average of 16.4, but above the 10-year average of 14.6

It’s important to consider taking P/E ratios with a grain of salt, however. For example, that 10-year average might be a little misleading, considering it includes the stock market collapse of 2009 when valuations cratered to multi-year lows. The five-year average is arguably a better comparison. Some of the strength in stocks so far this year might reflect investors swooping in to pick up some names at relatively cheap values, analysts have said in the media, but the question is whether that necessarily would continue if valuations do approach the five-year average.

Can “E” in P/E Hold Up?: The other thing to consider keeping in mind with P/E ratio is the chance of the denominator (E) slipping. Earnings estimates for 2019 have come down in recent weeks, and there’s no guarantee they won’t go down further. If that happens, stocks could suddenly appear more expensive even if prices haven’t risen. That’s why investors might want to consider carefully watching company guidance and analyst estimates for 2019 earnings. So far, Q4 earnings are coming in about as expected, with S&P 500 earnings per share growth averaging just over 12%, according to analysts. That’s down, however, from initial average analyst estimates for around 14%. 

We’re also seeing estimates for Q1 earnings descending, with research firm CFRA now predicting just 1.5% S&P 500 earnings growth in Q1. According to a FactSet, analyst expectations for earnings growth in Q1 have now turned negative (down 0.8%) as many company outlooks fall short. It says six of 11 sectors are now projected to report Q1 earnings declines, among them info tech, energy, and consumer discretionary. If this proves the case, it could pose a test for the Wall Street rally.

Long Haul: You can talk about the “Fed put,” strong Q4 earnings results, and rising hopes for a solution to the China trade situation. These factors arguably play a role in the U.S. stocks’ solid start this year. However, another factor might also be at work. Investors who’ve been in the markets for a while have gotten used to seeing sharp slides in the major indices get quickly erased time and time again. It happened in the aftermath of the 2008/2009 recession and then again after the market correction of 2015/16. Last summer’s rally to record highs followed a spring sag. Then late last year, the S&P 500 (SPX) fell nearly into bear territory. Many long-term investors may have figured they’d seen this movie before and apparently decided to stay in the market rather than flee. Now stocks are up double-digits since the Dec. 24 low. While past performance can’t ever predict the future and we’re not necessarily out of the woods with so much geopolitics and the potential for lower Q1 earnings, so far in 2019 those who held on through the dive in late 2018 are looking prescient. For now, at least.

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: Federal GovernmentEarnings Government News Global Federal Reserve Markets General

 

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