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Hot, Fresh Earnings On The Menu As Netflix, Morgan Stanley Results In Focus

Hot, Fresh Earnings On The Menu As Netflix, Morgan Stanley Results In Focus

Wall Street took on a slightly green tint early Wednesday as investors sorted through another bag of hot, fresh earnings. Morgan Stanley’s (NYSE: MS) latest quarter got an early thumbs up from investors, but, Inc. (NASDAQ: NFLX) appeared to get a thumbs down.

Morgan Stanley became the latest big bank to report early Wednesday, and this time the news looked pretty good from the standpoint of beating expectations. One thing to consider, however, is that even though the company’s results outpaced third-party consensus estimates for both earnings and revenue, MS saw profit fall year-over-year and cited a slow Q1 trading environment. That matters because MS is a firm that’s taken the mantle on the trading business in recent quarters and relies more on trading than many of its competitors.

Despite that, shares of MS jumped more than 2% in pre-market trading and potentially could help underpin Financials after Tuesday’s big gains for the sector.

The earnings flow is going to slow down slightly toward the end of the week after this morning’s deluge that also included Abbott Laboratories (NYSE: ABT) and PepsiCo, Inc. (NASDAQ: PEP). Tomorrow brings Phillip Morris and Union Pacific Corporation (NYSE: UNP), but then things tail off into Friday’s holiday. Next week looks like a big one, though, with Boeing Co (NYSE: BA) and Microsoft Corporation (NASDAQ: MSFT) among the highlights. BA’s earnings call next Wednesday could be one of the more anticipated ones of the season as many investors await more clarity on the 737 MAX situation.

PEP earnings looked relatively strong and the stock got a lift in pre-market trading. The company’s snacking business carried the day with Frito-Lay sales growing more than 5% from a year ago.

Chinese Fortunes Improve

It was just one-tenth of a percentage point, but China’s gross domestic product (GDP) outdid expectations in Q1, rising 6.4%. Analysts had expected 6.3%, according to Trading Economics. Industrial production and retail sales also surpassed consensus estimates, so all of this might help lift some of the clouds that had hovered over China’s economic picture the last few months. Decent exports reported last week helped set the tone for Wednesday’s data.

Still, Chinese stocks didn’t seem to get much juice out of the news, rising only slightly on Wednesday. One thing the data might also point to is that China’s economy seems to be rolling along in pretty decent shape despite U.S. tariffs, though it’s true that 6.4% growth is relatively low compared with much of the last decade. Does this have any implications for resolving the trade battle? We’ll have to wait and see.

Netflix Preview Disappoints

Investors took an earnings double-whammy after the close Tuesday when both IBM (NYSE: IBM) and Netflix slipped following their respective Q1 reports. Starting with NFLX, most of the Q1 numbers looked pretty good. NFLX beat third-party consensus on earnings and met revenue expectations, but investors appeared disappointed with the company’s guidance. Third-party consensus for Q2 had been $0.99 going into earnings, but NFLX forecast just $0.55. Its net subscriber guidance for Q2 also came in slightly below Wall Street’s expectations.

As we’ve often seen with earnings lately, investors tend to punish companies that don’t deliver the kind of bullish guidance many analysts are looking for, and that appeared to be the case with NFLX. The soft guidance also might trigger some concerns about how the company might deal with so much new streaming competition in coming quarters. Also, it could raise questions about whether NFLX’s recent price increases could be slowing subscriber growth.

NFLX shares fell sharply after Tuesday’s close but then bounced back to some relatively strong gains in pre-market trading. It appears maybe some investors are starting to look past the guidance and back toward what some analysts called a successful Q1 for the company. A bullish analyst report on NFLX from a major investment bank, along with several other positive Wall Street assessments, appear to be helping shares.

IBM fell even more sharply, down 3%, after the close as investors digested a Q1 revenue miss. It marked the third quarter in a row of year-over-year revenue losses for the company. It’s also not too uplifting to see the company’s Cloud & Cognitive Software segment fall 1.5% in revenue year-over-year.

Semis Applaud Apple Deal

Away from the hum of earnings, there was big news in the Info Tech sector Tuesday as Apple Inc. (NASDAQ: AAPL) and Qualcomm, Inc. (NASDAQ: QCOM) agreed to dismiss all litigation between the companies and reached a six-year licensing agreement. The two had been in a long legal battle about royalties related to smart-phone technology. Shares of QCOM jumped more than 17% following the news, while AAPL shares inched closer to $200. No terms were disclosed, The Wall Street Journal said.

The dispute settlement seemed to lend support to other members of the semiconductor industry as well, with Advanced Micro Devices, Inc. (NASDAQ: AMD), Nvidia Corporation (NASDAQ: NVDA), and Micron Technology, Inc. (NASDAQ: MU) all climbing. However, shares of Intel Corporation (NASDAQ: INTC) didn’t initially join the party, which may reflect investor disappointment over possible lost hope for more business with AAPL.

Semiconductor stocks hit a new high for the year Tuesday, and this might signal more than just excitement over the AAPL/QCOM agreement. Semiconductors are often seen as a leading indicator for economic growth, so strength in the sector might reflect investor confidence in economies around the world. Part of this could ride on higher hopes for a U.S./China trade deal, along with relief about the possible extension of Brexit into October.

A dovish Fed also arguably plays a big role in the current rally, which has seen cyclical stocks like Info Tech lead the way. Headlines this week that more than one Fed member thinks the Fed can possibly be comfortable with slightly higher inflation could feed into this as well. The Fed’s favored inflation gauge—the core personal consumption expenditures (PCE) index—is currently at 1.8%, the lowest in around three years.

It would likely take a major upside surprise in PCE prices to get markets worried much about the Fed at this point, analysts say, which might be one reason why the rise in Treasury yields this week hasn’t really seemed to slow down stocks too much. The 10-year yield rose to 2.6% on Tuesday for the first time in nearly a month, but it remains slightly lower than at the start of the year and well under highs of more than 3.2% last fall.

More Industrial Softness

If investors were hoping March Industrial Production data would show a U.S. factory turn-around from recent weakness, they might have walked away disappointed Tuesday. The number fell 0.1% month-over-month, below the consensus for a 0.2% rise. On a year-over-year basis, manufacturing output fell 1.1% in Q1. This could play into weaker expectations for Q1 gross domestic product (GDP).

Health Care stocks went in divergent directions Tuesday despite solid earnings from UnitedHealth Group Inc (NYSE: UNH) and Johnson & Johnson (NYSE: JNJ). Shares of UNH fell 4% and are down sharply over the last week as worries grow that new laws under discussion in Washington, D.C., might hurt the health insurance sector. The company’s CEO spoke against “Medicare for all” in the UNH earnings conference call. He also said health care price inflation has been slowing.

Looking ahead toward later this week, Thursday brings March housing starts and building permits, both of which are expected to rise slightly from a month earlier, according to consensus. The markets are closed Friday for the Good Friday holiday, so investors might want to consider being on the lookout for possible volatility ahead of the long weekend.


Figure 1: SEMIS ON A TEAR: Semiconductor stocks rallied to new 2019 highs Tuesday, partly on hopes for economic strength but also amid news that Apple and Qualcomm had reached a settlement. 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.

Theme Party For Banks: There seems to be a theme developing with bank results so far. Most of the big banks appear to be struggling on the trading side, trying to cut costs, repurchasing shares, and doing pretty well on the bottom line but not so great on revenue. Like some of the other banks, Bank of America Corp (NYSE: BAC), which reported Tuesday, did a little better than some analysts had expected on net interest income thanks in part, possibly, to the Fed’s latest rate hike back in December. One question to consider about banks’ businesses looking ahead is a dichotomy in the rate picture. On the one hand, the yield curve—part of which went negative last month—is back into a position where it could be more favorable to bank profits. The other side of the story is that the Fed has basically said it plans to stand pat on yields throughout the year, a potential challenge for banks trying to grow their profit margins.

“Resilient” Oil Demand, Including in China: U.S. crude prices are up about 50% since the lows near $42 posted around Christmas. Strong U.S. demand is one story, but perhaps a surprising development is hefty demand from China, too. This comes despite a number of data points indicating some slowness in the Chinese economy. Not on the energy demand front, however.

“In China, the economy seems to be reacting to the government’s stimulus measures, with purchasing managers’ indices increasing and export orders recovering, although there are signs that air cargo volumes might be falling,” the International Energy Agency recently said. “Preliminary oil demand numbers for the January-February period show solid growth.” Also, oil market publication recently quoted a commodities analyst at a major U.S. bank saying that oil demand is “solid” now in China. These developments might work against notions that falling oil demand points to problems in the world economy. On the contrary, said, oil demand looks “resilient” even amid some slowness in economic growth.

Big Spender?: As a young person starting out, it can be very tough to buildsavings habits early. A survey released early this year by TD Ameritrade onspending habits by generation shows that some millennials might be finding thatout the hard way. The survey showed average monthly spending onnon-essentials—including travel, gifts, and dining out—for most Americans is $697. However, the average for millennials is highest at $838 a month.Millennials also were most likely (49% of those surveyed) to say non-essentialspending affects their credit card debt.

Even more worrisome is that 64% of millennials surveyed said spending on non-essentials has a negative impact on their retirement savings. As a young person, retirement can seem far, far away. While it’s not against the rules to have fun now and then, it's important to understand the power of compounding, and how it often works best if you get started as soon as possible. That might mean missing out on a few restaurant meals now and allowing some of that money to potentially go to work for you.

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.


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