Everybody loves a good comeback story, as golf fans might tell you following Tiger Woods’ unexpected victory at the Masters over the weekend. The markets have also staged quite a comeback since the end of 2018, and there was more evidence of that Friday when the S&P 500 Index (SPX) closed above 2900 for the first time since last fall.
The SPX is now up more than 23% from its Dec. 24 low as earnings season begins, and JPMorgan Chase & Co JPM got things off pretty nicely on Friday. Now it’s time for more big banks to report, and the first one Monday, from Goldman Sachs Group Inc GS, looks like it might be a bit of a puzzle.
Fresh Bank Earnings To Ponder
As detective Sherlock Holmes once said, “Well, Watson, what do you make of it?” Investors might be asking themselves the same question this morning after a first glance at Goldman Sachs’ earnings as another huge week of quarterly big bank reporting begins.
Goldman Sachs took care of business on the earnings side of the equation in Q1, easily surpassing third-party consensus estimates with a $5.71 earnings per share reading. The average analyst projection was $4.96.
However, revenue of $8.81 billion came in under third-party consensus of $9.07. The lower than expected top line appeared to reflect weaker trading activity in the quarter, something many analysts had predicted going into bank earnings due in part to low volatility in the markets and investor shyness after stocks cratered in December.
Fixed income trading revenue fell 11% to $1.84 billion, and stock-trading revenue tumbled 24% to $1.77 billion. There’s no way to get around it. These just aren’t very good numbers, though they weren’t surprising considering they came in near analyst estimates. The question is whether investors might discount some of the bad news in Q1 as a short-term obstacle that might be a one and done issue as the year rolls on.
With GS, you don’t like to see them miss on revenue, but management of expenses was so good it might have helped them manage the overall 18% trading revenue drop. The issue now is how do they continue to make things balance. Will trading revenue be able to come back enough? You can’t just cut and cut and cut. GS shares rolled back and forth between a bit higher and a bit lower in pre-market trading right after the report.
The other big bank this morning is Citigroup Inc C, which also posted better than expected earnings per share at $1.87 vs. third-party consensus of $1.80. Revenue of $18.6 billion came in just a little under analysts’ expectations. Fixed income trading came in above where Wall Street had been looking, but equities trading slumped. Remember, some of the banks might have gotten a lift earlier in Q1 from the Fed’s December interest rate hike, something that became apparent Friday with earnings from JPM.
Citigroup also appeared to do a good job managing expenses, and if you were bullish about the banks Friday it doesn’t look like Monday’s results would be likely to change things too much. The market doesn’t seem to have too much direction early on as many investors continue struggling to interpret the two big reports this morning.
The puzzle so far with bank earnings, despite Friday’s JP Morgan-assisted rally, is that you could make arguments either way about the quality so far. Wells Fargo & Co WFC, for instance, beat earnings expectations but saw shares get hit Friday due in part to disappointing guidance about the bank’s net interest income outlook. C and GS didn’t really have the flags waving in one direction or the other.
Earnings Helped Provide Friday’s Tailwind
After a rough start, the old week ended on a very strong note with the S&P 500 Index (SPX) finishing above 2900 for the first time in six months. The all-time high close is around 2930, so we’re getting pretty near.
The Dow Jones Industrial Average ($DJI) had an even better day than the SPX on Friday, due in part to the performance of two of its components: Walt Disney Co DIS and JP Morgan. The strength in JPM was likely a function of earnings, as the company kicked off earnings season by topping the Street’s expectations on both top- and bottom-lines. Also, it’s possible that positive comments about the economy from JPM Chairman and CEO Jamie Dimon might have added to the general good feelings across sectors Friday.
DIS was arguably one of the “happiest places” to be on Wall Street Friday as the stock catapulted to better than 11% gains after the company announced a streaming service offering lower prices than Netflix, Inc. NFLX. Perhaps proving Newton’s Third Law of Motion that every action has an equal and opposite reaction, shares of NFLX fell nearly 4.5% (see more on DIS and NFLX below). Friday’s double-digit gains brought DIS to a new all-time high, and it’s not often that one sees a DJIA stock rise more than 11% in a single session.
It was one of those days that showed how the DJIA can get easily influenced by just a couple of names, rising 1% while the SPX rose just a shade more than 0.6%. Still, both indices ended higher for the week. The SPX is up three weeks in a row going into the new week, and crude oil prices registered their sixth-straight week of gains. Volatility, meanwhile, continued to descend, as VIX ended the week just above 12. That’s down from 17 just a few weeks ago and well below the historical average of around 15.
Yields March Higher
As VIX dug a deeper hole, Treasury yields climbed. The slide below 2.4% in the 10-year yield earlier this year and the yield curve inversion seem like faraway memories now, with the 10-year yield back above 2.55%. That’s still below where they were at the start of 2019, but the push above what some analysts saw as key resistance at 2.55% might help set a more positive tone for the week ahead. Falling yields earlier this year had caused some hand-wringing about a possible recession. Now we’re starting to see U.S. economic growth estimates turn higher.
Speaking of higher, some analysts are now looking at the two bank earnings Friday—JPM and Wells Fargo—and wondering if current Q1 S&P 500 earnings estimates might be a bit too negative. One thing to consider is that it’s still very early to be talking about this. Another week or two of earnings from across multiple industries might help clarify whether the average analyst estimate for a low-to-mid single-digit year-over-year earnings decline is still in the cards.
However, one thing we might have learned Friday was that it’s easy to live in the moment and overlook something that happened a while back. JPM’s quarter, in particular, appeared to benefit from the Fed’s late December rate hike, and that’s something many people didn’t really factor in. The biggest surprise in JPM was trading revenue not being as bad as many had thought, but in a way JPM had a big first-mover advantage. Now the onus might be on Goldman Sachs and Morgan Stanley MS to show that they, too, had good trading quarters.
From a sector standpoint, the week ended with cyclical stocks ahead of the game. Industrials, Financials, and Communication Services were some of the biggest gainers, while Health Care and Staples stayed in the rear. This is often the kind of market action one sees when investors feel positive about the economy. This week brings some more economic news, including China’s Q1 economic growth, U.S. March retail sales, U.S. March housing starts and building permits, and U.S. March industrial production (see more below). We’ll also have the Fed’s Beige Book for April, which is a summary of business activity across Federal Reserve member banks.
Also remember that this is a shortened week, with U.S. markets closed Friday for the Good Friday holiday. That could potentially cause some heightened volatility Thursday ahead of the long weekend.
Figure 1: OUT OF SYNC: After moving closely together much of last year, 10-year Treasury yields (candlestick) and the S&P 500 Index (purple line) have gone different directions so far in 2019. Although yields are starting to gain some ground over the last week or two, they still remain down for the year even as stocks continue moving rapidly higher. The question is whether this dichotomy can continue. Data Sources: Cboe, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade.For illustrative purposes only. Past performance does not guarantee future results.
Don’t Forget Big Blue: Amid the slew of bank earnings early this week, it might be easy to forget it’s not all about the Financial sector early in earnings season. For instance, most investors are probably aware that FAANG member Netflix is due to report tomorrow, but so are Johnson & Johnson JNJ and CSX Corporation CSX, along with United Continental Holdings UAL and IBM IBM. Between these four, investors might get a really good sense of trends in health care, consumer goods, air travel, transport, and to some extent, Info Tech.
Of all these earnings reports, IBM might be among the most interesting. The company delivered strong Q4 earnings and issued robust guidance the last time it reported, back in January. Revenue, however, declined year-over-year. Consider watching results from IBM’s Technology Services and Cloud Platforms segment, which posted nearly $9 billion in Q4 revenue but just missed analysts’ expectations. It might also be worth checking in to see if IBM has any updates on its acquisition of software firm Red Hat Inc RHT.
Soft Industrial Production Mulled Ahead of Data: Tomorrow brings the latest monthly industrial production data from the Fed, and it follows three consecutive months of weak performance for this key metric. Last time out, in February, industrial production rose just 0.1%, and it fell in January. Softness in durable goods manufacturing was the story earlier this year, and that could reflect falling demand from both businesses and consumers for some of the bigger ticket items like machinery and major appliances. Manufacturing output fell 0.4% in February, while utilities output was the report’s only real strong point.
One question heading into the March report tomorrow is whether the Fed’s decision to keep interest rates low might have increased demand from where it was in January and February, when the Fed had just raised rates for the fourth time in a year. Another question might be whether higher commodity costs are playing a role in current softness. Crude has been on a tear most of the year, and some of the industrial metals like copper have been climbing again, too.
Greenspan Delivers Note of Caution: Former Fed Chairman Alan Greenspan made some bearish comments on CNBC early Friday, saying growing U.S. deficits and the rising cost of entitlements pose dangers in the future. He’s also worried about inflation. His remarks didn’t seem to hurt markets too much Friday, but they could help serve as a reminder that the markets are reaching historic highs now and prudence is never a bad idea. With the SPX only about 1% away from its all-time high close, it might not be the best time for investors to go “all-in.” Also, with the old quarter done, now could be a good time to consider looking at your performance and seeing if Q1’s big stock market rally has your portfolio more weighted to stocks than you originally intended. Greenspan long ago warned about the danger of “irrational exuberance,” and while the markets and economy do appear healthy, his words still have meaning for investors who might be getting carried away by this fierce rally.
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