Market Overview

After Hitting Highest Close Ever, Market Starts Day Off With Weak Boeing Results

After Hitting Highest Close Ever, Market Starts Day Off With Weak Boeing Results

Strong company guidance and a number of big earnings beats helped push the S&P 500 Index to an all-time high close yesterday, but today might see a slight headwind from Boeing Co (NYSE: BA) after the aircraft maker’s earnings came up short.

Boeing missed third-party estimates, pulled its earnings guidance, and stopped its share buyback program in the wake of the March crash of its 737 MAX, the second MAX crash in six months. BA said it would wait to post new guidance until it has more clarity on the aircraft’s fate. You don’t often see a company withdraw its estimates, but this is a pretty unusual situation.

The question that hangs over BA ahead of its earnings call is how future orders might be affected by the situation. That call could be one of the most listened-to earnings calls in a while.

Earnings of $3.16 a share fell several cents shy of consensus views, while revenue of $22.9 billion also came up short. The company said it’s committed to safety and getting the 737 MAX back into service, but the earnings report was about as weak as many had expected, if not more. Shares rose a bit in pre-market trading, however, maybe because some of the bad news was built in with the stock down 15% over the last month.

Boeing wasn’t the only company reporting on a busy earnings morning. AT&T Inc. (NYSE: T) came up shy of the Street’s revenue estimate and saw shares get hit, while Caterpillar Inc. (NYSE: CAT) beat analysts’ estimates on earnings and revenue and raised guidance. CAT shares rose just slightly and then fell back. Sometimes when you see a stock fall despite an earnings beat, it could mean a “whisper” number was out there that was even higher than the results. Or some investors might be discounting the better guidance because part of it is based on a tax benefit.

Herding CAT

With CAT holding its quarterly earnings call today, some things to consider listening for include anything its executives might say about demand from Chinese customers. CAT is often seen as a bellwether for the Chinese economy since it sells so much heavy equipment there. There’s also the strong dollar and its possible impact. Other companies haven’t really been talking about that, but the equipment CAT sells tends to be big-ticket and pricey, so CAT might be one of the first companies to feel the chill. 

The Dollar Index rose to 97.58 on Tuesday, near its yearly high. More importantly from an earnings perspective, the dollar spent much of Q1 above 96, vs. close to 90 in Q1 of 2018.

Before this morning’s earnings potpourri, a couple major firms reported following yesterday’s closing bell. EBay Inc (NASDAQ: EBAY) became the latest to beat third-party consensus on earnings and revenue, helping the stock to 3% gains in the pre-market hours.

Texas Instruments Incorporated (NASDAQ: TXN) delivered some positive news from the chip space, where it’s often seen as a bellwether. TXN earnings and revenue both surpassed Street projections, raising hopes for other chip makers who saw demand for some products slow down late last year due in part to China’s economic weakness. Though the company’s Q1 results came in below year-ago levels, it offered guidance that appeared to please investors. Shares were down a bit early Wednesday.

Looking ahead to this afternoon, Microsoft Corporation (NASDAQ: MSFT) earnings loom. Its Azure cloud offering, which saw 76% growth in the company’s fiscal Q2, is likely to be under a microscope. One question is whether cloud growth in the company’s fiscal Q2 got hurt by the slowing global economy and may have bounced back in fiscal Q3. Shares of MSFT are up sharply so far this year, perhaps a sign that investors are optimistic that’s the case.

We’ve Met the Catalyst, and It is Earnings

Entering earnings season, it seemed like the market needed a catalyst to launch itself back toward last autumn’s all-time highs. That catalyst turned out to be earnings themselves, as well as company forecasts. We’re getting a nice forward-looking picture from many companies. Twitter Inc's (NYSE: TWTR) results yesterday were potentially a good sign for social media companies that have been struggling. Lockheed Martin Corporation’s (NYSE: LMT) results and forecast might mean other Industrial companies are also thriving.

Stronger than expected corporate results arguably played the biggest role in sending the S&P 500 Index (SPX) to Tuesday’s new all-time closing high. The SPX is up about 25% from its Dec. 24 low, but back to about even with where it was late last September. The all-time intraday high is just a few points away, at a little under 2941. That could be a technical resistance area, so we’ll see if the market challenges that level today.

Though we’re revisiting the September highs, this is a different sort of rally than we had back in the summer. Instead of being led by four or five stocks (namely the “FAANGs”), this one looks much more broad-based and healthy. The FAANGs are doing well, but none are really leading the charge. Semiconductor stocks are carrying more of the load, but they’re not alone. Home builder, Energy, and some of the Industrial companies have steadily climbed much of the year, though Info Tech continues to be the top performer.

Even Financials, which were a laggard much of last year even when the market was in rally mode, have put on a little run in 2019, though the sector’s 14% gains year-to-date trail the 17% gains of the SPX. Earnings for the five biggest banks in Q1 were a mixed bag, but a positive move in the yield curve over the last week or two might have countered that a bit. Still, Financials were among the weaker-performing sectors Tuesday, along with Consumer Staples and Utilities.

Cyclicals have led the way most of the year, and it’s not necessarily a bad thing that FAANGs aren’t in front of the pack. People tend to forget that it’s good to have different names take leadership, and we’ve seen companies like Qualcomm, Inc. (NASDAQ: QCOM) and Western Digital Corporation (NASDAQ: WDC) play that role in 2019. The Walt Disney Co (NYSE: DIS) and Microsoft Corporation (NASDAQ: MSFT) are two other big companies having good years in the market.

Another potential positive factor compared to the last time the SPX reached this level is the Treasury market, where 10-year yields sit below 2.6%. Back in late September when the SPX hit all-time highs, the 10-year was well above 3% amid concerns about inflation and Fed rate hikes. Those concerns have basically melted away, for the most part. Yet here we are, back at all-time stock market highs again.

Top Heavy? Not Necessarily

One of the rubs some people are talking about is that the rally so far has mostly been a “big name” rally, with multinationals and major tech firms getting lots of love but small-caps getting left behind. That’s a bit hard to take too seriously, however, when you consider that the Russell 2000 Index (RUT) of small-caps is up 17.5% this year, slightly outpacing the SPX. That said, the RUT is still about 9% from its all-time high posted last summer, back when it became the first major index to start catching a flu that rapidly spread to the rest of the market.

One thing being forgotten here could be some of the dangers still facing stocks, including the lack of a China tariff resolution, rising gasoline prices, tensions between the U.S. and Iran, and a Brexit process that’s stuck in neutral. Also, while U.S. Treasury yields have moved higher lately amid talk of possible improved U.S. economic growth, they remain well under 2.6% for the 10-year note, one sign, maybe, that at least some investors remain cautious.

The Fed meets at the end of the month, and while it isn’t expected to make any rate moves, it could be interesting to hear any new economic observations from Fed Chair Jerome Powell and company. At this point, CME futures show more than a 99% chance of the Fed standing pat in May, with about a 20% chance of the Fed cutting rates in June. One factor to possibly watch ahead of the meeting next week could be this Friday’s first Q1 gross domestic product (GDP) estimate. Analysts expect 1.9% growth, according to a consensus. That would be down from 2.2% in Q4.

Figure 1: WELL HELLO, DOLLAR!: One possible factor that might help put the brakes on this stock market rally is a U.S. dollar (candelstick) that’s been steadily marching higher as enthusiasm about the U.S. economy grows. As the dollar strengthens, gold (purple line) has descended to new 2019 lows below $1,275 an ounce. Data Sources: ICE, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  
Back to the Drawing Board on Earnings?: It might be interesting to see if earnings estimates for Q1 start to change in the days ahead after Tuesday’s rush of better-than-expected resuslts from key companies. Of course, there’s a long way to go until the end of earnings season, but we’ll be about 50% of the way there by the end of the week. Upside earnings surprises have seemed like the rule so far, not the exception, in a season when many analysts had predicted a moderate overall decline in year-over-year S&P 500 earnings results. Earnings are down year-over-year, but how much they’ll ultimately fall remains a moving target. 

Early this week, FactSet predicted that assuming earnings surprises are at “average levels” this season, overall S&P 500 earnings would be down “slightly” in Q1. But “slightly” is a lot better than a 4% or worse decline that many analysts had predicted before the season started. Hopes that the patient might be among the walking wounded rather than in a hospital bed could help explain the S&P 500 Index’s (SPX) rise to near record highs Tuesday.

Home Brew: Speaking of wounded, that might still be the best description for the U.S. existing home market following downbeat data early this week. The headline number in March fell short of analysts’ expectations even though mortgage rates fell during the month, and might suggest that rising home prices and a lack of affordable homes might be keeping buyers in check, said. The news on March new home sales was far sunnier, though new homes are a much smaller market catering to a generally wealthy group of buyers. New home sales rose 4.5% month-over-month and 3% year-over-year last month. 

That might have been helped by the median new home price falling nearly 10%, compared to a nearly 4% rise in existing home prices. New home prices had the smallest margin over existing home prices since last June, and existing home prices have now risen 85 months in a row. Tomorrow brings earnings from home builder D.R. Horton Inc (NYSE: DHI), and it might be worth listening to what executives have to say about how lower mortgage rates are affecting the market.

Pass the (Healthy) Fries: Trying to eat healthier? It seems like a lot of people are, and U.S. farmers have apparently started to take note. Over the last five years, farmers have devoted more acres to crops like sweet potatoes, romaine lettuce, kale, and spinach, the U.S. Department of Agriculture reported this month. Acreage planted with kale, for instance, rose nearly 150% between 2012 and 2017. Sweet potato acreage grew almost 50%. Losing ground (literally) were crops like sweet corn, peas, and potatoes. The shift might reflect dietary trends, the Washington Post reported. "Why sweet potatoes? White flour, white potatoes and white rice have been vilified over the past decade for their easy digestion and high glycemic load,” The Post said. "Sweet potatoes have fewer carbs and calories, as well as higher levels of vitamins A and C. On upscale menus, they often replace the Idaho russet in fries or tots.” Even fast-food companies like McDonald Inc's (NYSE: MCD) are gettng into the act, with MCD now offering sweet potato fries in some countries. MCD reports next week, but it seems doubtful that sweet potatoes will be high on the list of earnings topics.

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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