Market Overview

Weak Boeing, Caterpillar Q2, Rate Pressure On Banks, All Weigh

Weak Boeing, Caterpillar Q2, Rate Pressure On Banks, All Weigh

Investors watching the Dow Jones Industrial Average ($DJI) might get a skewed picture today, as the $DJI could come under more pressure than other indices due to pressure from some of its main components.

Weak earnings from Caterpillar Inc (NYSE: CAT) and Boeing Co (NYSE: BA)—along with possible rough sledding for  some of the big financials amid falling Treasury yields—might gang up on the $DJI today even as the broader S&P 500 (SPX) takes less of a pounding. At the same time, the Nasdaq (COMP), dominated by technology companies, could struggle as investors react to a government investigation of some of the biggest Technology and Communication Services sector firms.

Earnings keep coming fast and furious, and results early Wednesday ranged from pretty good to dramatically bad.

On the good side, there was United Parcel Service, Inc. (NYSE: UPS) beating on top- and bottom-lines and reaffirming guidance. It might be interesting to hear what executives say about the delivery business, which sometimes can be a canary in a coal mine when it comes to economic strength. Last month, FedEx Corporation (NYSE: FDX) warned that a slowing world economy posed a threat.

AT&T Inc. (NYSE: T) looked decent enough on the surface, beating analysts’ average earnings per share estimate. However, the company suffered a net loss of 778,000 premium video subscribers in the quarter, mostly DirecTV satellite. That’s arguably T’s earnings in a nutshell. The streaming wars continue to have effects not just on the streaming companies but on traditional cable companies, too. This is a hard blow for T. They did beat on sales, which is positive, and they are planning to get in the streaming game themselves soon, including with the launch of WarnerMedia’s HBO Max. But losing that many subscribers might not be well received, and the stock edged lower in pre-market trading.

On the bad side, earnings from Boeing (BA) showed a quarter the company would probably like to forget. While analysts already expected disappointment, the actual results were way below expectations. BA reported a deep earnings per share loss and missed analysts’ revenue projections by more than $2 billion.

It’s a bit of a head-scratcher to see the stock down less than 1% in pre-market trading, but maybe that’s because no one was expecting a bed of roses as the company wrestles with its 737 MAX issue. The really important thing is to see what executives have to say about when they think the troubled plane can get back into the skies.

More rocky Q2 news from the Industrial sector surfaced early Wednesday as Caterpillar (CAT) missed earnings expectations by a pretty big margin. Revenue came in as expected, but lower Chinese demand was a flashing light in CAT’s earnings press release. Here in the U.S., the company’s Energy and Transportation unit took a hit amid falling demand from the oil-producing Permian Basin. This might be something to consider looking ahead to some Energy sector company reports.

CAT shares fell about 4% in pre-market trading, but the good thing is the company maintained its profit guidance and forecast modest revenue growth for the full year.

Outside of earnings, another thing to consider keeping an eye on today is the Technology sector. A late news flash yesterday about the Department of Justice (DOJ) opening an antitrust review of big-tech companies hurt some shares in post-market trading.

A few of the companies that might see an impact from the investigation include Facebook, Inc. (NASDAQ: FB),, Inc. (NASDAQ: AMZN), Alphabet Inc (NASDAQ: GOOG) and Apple Inc (NASDAQ: AAPL), according to The Wall Street Journal. The government is investigating how the companies achieved market power and if they’re engaging in practices that have reduced competition, stifled innovation, or otherwise harmed consumers. This looks like one of those ongoing things that might be a background worry for investors over the coming months, though it’s hard to say how much of a long-term impact it might have on share prices. 

Facebook, Inc. (NASDAQ: FB), Ford Motor Company (NYSE: F), and Tesla Inc (NASDAQ: TSLA) dominate this afternoon’s earnings picture, so investors might want to keep on their toes for any possible surprises. With FB possibly one of the targets of the DOJ probe, any comments about that on FB’s earnings call might get extra attention. The company was already expected to spend some time on its call addressing privacy issues and a potential $5 billion fine from the Federal Trade Commission (FTC).

Arguably the biggest (and best) news of the quarter for TSLA has already been digested. The company reported better-than-expected car deliveries for the second quarter. One question executives might get asked is how they’ll meet their projected delivery goals for the full year.

China Talks Return to the Front Burner

An early rally Tuesday picked up steam after reports that the U.S. and China would be talking face-to-face again about trade next week. That helped the S&P 500 Index (SPX) climb back above 3000 after dipping below 2980 on Monday. Tuesday marked the first time the SPX closed above 3000 in a week.

Not to rain on any parades, but these U.S./China talks really need to be looked at in the right context. Through the trade saga, some people have put way too much focus on individual events. It’s just one meeting, and it’s hard to believe anything is going to get settled right away, especially when you consider how talks ended last time with both sides hardening their positions. 

While the rally on Tuesday looked nice, this recent move hasn’t been too easy to characterize. It seems like a different sector or group of sectors leads every day. On Tuesday, it was Financials, Materials, and Industrials, with some of those probably benefiting a bit from the China news. It could be some other sector today. It’s difficult to find any trends and there’s really no consistency. 

Dollar Hits Highest Point in More Than a Month

This week’s rally in stocks coincided with a rally in the U.S. dollar, which maybe seems a little surprising with the market signaling a rate cut coming. The dollar drew support early this week in part because U.S rates are still relatively high compared with negative ones in Europe and Japan, and also from analyst concern associated with a new British Prime Minister taking office. The political situation in London looks like it weighed on the British pound, and also the euro.

Amid all the European worries—and ahead of tomorrow’s European Central Bank (ECB) rate decision—it simply looked like the dollar was the strongest game in town, rate cut or no rate cut. The dollar index traded above 97.7 on Tuesday, the highest it’s been since early last month.

We’ve already heard some early reporting companies talk about the higher dollar and its impact on their Q2 results. Today brings a host of company earnings where a strong U.S. currency could have an impact, including Boeing, Caterpillar, and Ford. It might be interesting to hear if executives on those calls mention any currency effects. 

Big financial stocks delivered a solid performance pretty much across the board on Tuesday. However, rates are lower in pre-market trading early today, so that might put pressure on some of the Financial companies that shined yesterday. 

Consumer demand has been a big part of the rally these last few weeks, but maybe that got challenged a bit late Tuesday when Visa Inc (NYSE: V) reported its results. The company came in ahead of third-party consensus for revenue and earnings, but gave its full-year guidance a small haircut.

Visa’s stock has had an amazing run, so it wasn’t too surprising to see its shares fall about 2% in post-market trading after that news. The fact is, however, that payments volume growth of 9% in V’s quarter looked really strong, and might back up what JPMorgan Chase & Co (NYSE: JPM) said last week about credit card balances growing. So it’s really looking like a stretch to say V’s guidance cut necessarily disproves the thesis about a strong consumer.

If you’re looking for a couple of names whose stock moved the opposite direction of Visa’s in the after hours yesterday, Snap Inc (NYSE: SNAP) and Chipotle Mexican Grill, Inc. (NYSE: CMG) both come to mind. SNAP shares climbed 11% after the company reported stronger than expected Q2 user growth, while CMG beat third-party consensus estimates for revenue and earnings and saw its shares rise 4% in post-market trading. The company also raised its 2019 same-store sales outlook. CMG shares have been an investor darling all year and earnings don’t appear likely to change that.

Figure 1: BACK IN THE GREEN: The dollar index (candlestick) hit its highest level in more than a month Tuesday despite continued weakness in U.S. 10-year Treasury yields (purple line). Normally the dollar doesn’t climb with the Fed on the verge of a rate cut, but the U.S. economy and interest rates are still among the strongest around, which might be attracting investors to the country’s currency. Data Source: ICE, Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Fed Wins in a Knockout: While corporate results helped lift stocks early this week, so did that old adage, “Don’t fight the Fed.” Futures prices predict a 25 basis-point rate cut next week, so many investors appear to be taking the path of least resistance and bidding up stocks. At times like these, the soft economic data numbers seen in housing and manufacturing early Tuesday might actually be more helpful than positive outcomes, because they simply reinforce what people expect the Fed to do. 

That said, it’s not necessarily a good idea to ignore disappointing June existing home sales, which fell 1.7% to a 5.27 million pace after climbing 2.9% to a revised 5.36 million clip in May. Sales in June were down 2.2% year over year, with both single-family and multi-family homes lagging. This is despite lower mortgage rates, and could tell us that consumers still aren’t too wild to make big purchases. Also, the Richmond Fed manufacturing index dropped 14 points to -12 in July, the lowest since January 2013. The unexpected weakness was broadbased. These data, along with earnings growth that’s been a little above expectations but still relatively low, play into that same hymnal about not fighting the Fed, but also raise some eyebrows about exactly what kind of economic environment we’re in.

Getting Social: This week includes some key earnings “posts” from social media companies, including Facebook and Twitter Inc (NYSE: TWTR). Looking at the social media landscape going into earnings, there’s a lot of focus on potential regulatory issues, and a key thing to consider is that companies under a government shadow might see less of a potential bullish response if their earnings beat. It looks like there could be an extra layer of pressure because of what might happen next. Even if they have killer earnings, the fact that they’re in the crosshairs could limit gains. That dynamic arguably played out last week when Johnson & Johnson (JNJ)—the subject of a Justice Department probe—didn’t get much lift despite an impressive earnings performance across the entire company.

Beyond Discretionary with Amazon: Another chapter in the positive consumer story might be written tomorrow after the close when Amazon (AMZN) reports earnings, assuming AMZN benefits from strong U.S. employment and consumer confidence. Though AMZN is officially listed as a consumer discretionary company, it’s AMZN’s cloud business where a lot of the earnings excitement rests. In Q1, Amazon Web Services sales rose 41% year-over-year, so investors are likely to watch the Q2 results closely to see if AMZN was able to keep the hot run going.

As many analysts point out, the cloud is where much of AMZN’s profit growth is coming from and one of the fastest-growing revenue areas, too, but some expect growth in Q2 to fall below 40%. Commercial cloud revenue growth was 39% at competitor Microsoft (MSFT) in the company’s latest quarter, with its infrastructure platform Azure growing 64%. However, the Azure growth slowed from the previous quarter, and some analysts are wondering if this slowing growth might have an impact at AMZN, too.

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.

Image sourced from Pixabay


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