Disappointing 3M Results Weigh On Dow Futures As Earnings Season Marches On

Companies have been generally beating very low expectations during this corporate earnings season. That’s probably why the market is near highs, but it doesn’t seem like the S&P 500’s (SPX) record close earlier in the week generated as much follow-through buying as might have been expected. 

With stocks near all-time highs, investors and traders may not be sure how to proceed. But for now, volatility remains muted as investors continue to watch earnings season unfold.

This morning, index futures were mixed. Dow Jones Industrial Average futures took a beating after 3M Co MMM reported earnings and revenue that missed expectations, announced 2,000 layoffs, and cut its 2019 earnings forecast. But with MMM making up less of the overall mix of the S&P 500, futures for that index were faring better.

And tech-heavy Nasdaq futures were doing the best of the big three index futures after solid earnings reports from Facebook, Inc. FB and Microsoft Corporation MSFT. 

FB shares were up more than 8% in pre-market trading this morning after the social media giant reported better-than forecast revenue. The story certainly seems to have shifted from where the company was just a few months ago.

FB said it had 1.56 billion daily active users and 2.38 billion monthly active users. Average revenue per user of $6.42 beat expectations. Facebook, Messenger, and WhatsApp Stories features now have 500 million daily active users. 

Meanwhile, MSFT reported earnings and revenue that beat analyst expectations, helped by sales in the company’s cloud business, and Tesla Inc. TSLA reported a much bigger loss than expected as revenue was less than forecast. 

Market Takes a Breather 

Mixed earnings reports and uncertainty at new highs didn’t leave the market with reason to move higher Wednesday, and all three major U.S. indices ended the day in the red. Participants may also have been keeping some powder dry ahead of earnings from MSFT and FB and with Amazon.com, Inc. AMZN and Intel Corporation INTC reporting Thursday.

Investors and traders may have been moving into bonds, as an index measuring German business morale unexpectedly fell. The decline in morale comes amid worries about slowing global growth as the U.S.-China trade war drags on. On that front, the White House said U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will head to Beijing for another round of negotiations to begin on April 30 and Chinese Vice Premier Liu He will be in Washington for more talks to start on May 8.

The German data also pressured the euro, even as the dollar got some strength on support from stronger-than-expected new home sales data. 

New home sales in March rose to a seasonally adjusted annual rate of 692,000, when a Briefing.com consensus had expected a reading of 646,000. The housing market, which has been hamstrung by affordability issues, was helped by a decline in the median sales price and lower mortgage rates.

Mixed Earnings, Energy Keep Street Subdued

The housing data didn’t seem to help stocks too much on Wednesday, as earnings were mixed and energy shares stumbled.

Caterpillar Inc CAT beat third-party analysts’ estimates on earnings and revenue and raised guidance, but its shares ended the day more than 3% lower. One of its executives warned the company could lose market share in China, comments that apparently outweighed the strong earnings. The company also reported higher costs that ate into margins. 

Also, 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.

In a reverse image, Boeing Co’s BA shares gained slightly even though the aircraft manufacturer 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. 

The slight rise in the company’s shares could be because investors and traders were expecting bad news and there may have been some relief that the company’s report wasn’t worse than it was. 

In a stock move that perhaps makes more sense on the surface, AT&T Inc. T shares dropped more than 4% after the wireless carrier missed revenue expectations. 

In sector news, energy was decidedly unenergetic Wednesday. With a 1.85% slump, it was the SPX’s worst performing sector of the day. 

U.S. oil futures declined following a larger-than-expected jump in U.S. crude inventories. The Energy Information Administration said stockpiles rose 5.5 million barrels last week when, according to Reuters, analysts had expected a build of just 1.3 million barrels.

Figure 1: The U.S. dollar gained ground Wednesday on surprisingly strong U.S. housing data and as the euro slipped on disappointing data about business morale in Germany. Data Source: Chart source: ICE The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Allocation Check: The question now that the market is near all-time highs might be whether we start to see some investors take a little money off the table, especially considering the popular but not necessarily valid old saying, “Sell in May and go away.” While past isn’t necessarily prologue, the late spring and summer months have often been weak ones on Wall Street. On the other hand, the market has slowly been grinding up all year despite a hitch here and there, and some analysts seem to think this slow grind may still be the path of least resistance. As long-term investors often hear, it may be a good time to check allocations and make sure this surge in stocks since Jan. 1 hasn’t put you into a top-heavy position in terms of equities vs. fixed income. Sticking with long-term plans and goals often can be a good policy, rather than getting carried away by too much enthusiasm.

Onward and Upward? The S&P 500’s new record close on Tuesday comes amid a bull market that isn’t short on superlatives. “This 12th bull market since WWII is now being referred to as a ‘Lake Wobegon Bull’ since it is above average in terms of magnitude, duration, valuation and accompanying GDP growth,” investment research firm CFRA said. This bull market has gained 334% from its low on March 9, 2009, compared to the median rise of 94% for all bull markets since WWII, the firm said. It’s also been the longest, lasting for 122 months versus a median 55 months, CFRA said. “History says that even though a digestion of recent gains is likely, relatively low interest rates and inflation, combined with improving EPS growth projections, point to additional new highs in the period ahead,” CFRA said. 

Pessimism Overdone? One theme of this earnings season has been low expectations from analysts forecasting corporate earnings per share. But BMO Capital Markets thinks the 7% that analysts lowered Q1 EPS expectations in the three months leading up to the reporting period has been excessive. “These lowered expectations have reignited talks of an earnings recession yet again with many market pundits predicting a disappointing reporting period and a significant pullback in US stocks,” a BMO note on Wednesday said. “However, we reject this notion, and instead see flattish to slightly negative EPS growth for Q1, and a return to positive growth in the forthcoming quarters as companies surprise to the upside.”

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