Host Of Earnings Loom With Beyond Meat, Apple Among Highlights Ahead Of Fed, Payrolls

A Fed meeting. Apple earnings. The monthly payrolls report. Renewed talks with China.

This week has it all, and it starts with the stock market at all-time highs after solid results late last week from Alphabet Inc GOOG, Starbucks Corporation SBUX, and Twitter Inc TWTR. A better-than-expected read on Q2 gross domestic product (GDP) didn’t hurt, either.

Earnings have generally been a bit better than expected, but we’re only about 40% of the way through, and this week could go a long way toward telling the full story with around one-third of S&P 500 companies reporting. One of the big ones to potentially watch today after the close is Beyond Meat Inc BYND. More on that below.

Also, a little merger and acquisition (M&A) news crossed the wire early Monday when Mylan NV MYL and Pfizer Inc PFE announced an agreement to combine Mylan with Upjohn, Pfizer’s off-patent branded and generic established medicines business, creating a new global pharmaceutical company.

There’s some optimism Monday as U.S. and Chinese negotiators prepare to sit down again tomorrow in Shanghai, but it’s way too early to get excited.

Looking at earnings performance, the theme lately has arguably been simple: Consumer good, and international bad.

U.S. manufacturing companies with heavy exposure to China seem to be struggling on the earnings front, while U.S. companies mainly driven by consumer spending at home are generally delivering much better earnings than expected. Earnings are breaking down along those lines in terms of companies reporting, overall. 

What to Watch: Fed Meeting and Payrolls Take Center Stage

Whether the consumer spending so critical to better-than-expected Q2 earnings so far can continue to drive growth longer-term is an open question. That’s why Friday’s July payrolls report might actually end up having more impact this week than the conclusion of the Fed meeting Wednesday (more about the Fed meeting below).

The healthy consumer continues to hide a lot of the economy’s ills, including weak manufacturing data. Despite wages and inflation not growing as much as some economists may have wanted to see, if people are employed, they tend to be spending money, and that helps keep the economy moving along. That’s why the payrolls report has so much influence.

The consumer’s contribution grew more evident with both earnings and gross domestic product (GDP) over the last week or two. Some of the companies reporting really strong earnings are big players in the consumer business, including Johnson & Johnson JNJ, McDonald’s Corp MCD, Chipotle Mexican Grill Inc. CMG, Starbucks, and The Coca-Cola Co KO.

At the same time, results haven’t been so great for some manufacturers like Caterpillar Inc CAT and companies that ship manufactured goods, like CSX Corporation CSX. Also, manufacturing firm 3M Co MMM beat consensus from Wall Street for earnings and revenue, but saw both fall from a year ago and its executives noted “slow growth conditions.” Trade with China seems to be weighing down some of these companies.

Friday’s GDP report also reflected consumer strength, with a big 4.3% jump in personal consumption expenditures in Q2. However, fixed investment fell 0.8%. It also looks like the better-than-expected 2.1% rise in GDP got a lot of its juice from a 5% rise in government spending during the quarter.

Looking back at two of the big consumer names on Friday, SBUX and MCD continued to impress. They both delivered large comparable sales numbers, and their breakfast menus continued to perform. Average tickets, or price paid per customer, rose for each of the fast-food giants, and when that happens it’s a home run. For SBUX, it could mean more people are picking up sandwiches to go with their coffee, for instance. SBUX shares rolled up big gains Friday but MCD didn’t move all that much.

Another part of the market doing well on Friday was the big financial companies, all of which were solidly higher after Citigroup Inc C, Bank of America Corp BAC and Goldman Sachs Group Inc GS got upgraded by an analyst at KBW. In his note, the analyst said in a nutshell that the strong economy outweighs the negative impact of lower interest rates for banks. 

Market Expects Quarter-Point Haircut From Fed

Since the Fed is an unavoidable topic this week, it’s probably worth closely monitoring the CME Group’s FedWatch tool the next few days. As of Monday, futures trading indicated a 77% chance that the Fed will cut rates by 25 basis points on Wednesday. There’s just a 23% chance of a 50-point slice.

The question is how the Fed ends up framing the cut. Will it be a “one and done” with the Fed deciding to retreat to the sidelines and watch the data roll in again, or will Fed Chairman Jerome Powell signal any openness to more rate cuts? The futures market still predicts one to two additional cuts later this year, and some analysts think that’s built into the major indices. This could mean any hawkish Fed talk has a chance to cause a quick pullback. The psychological 3000 mark for the SPX held up when it got tested late last week, and could represent support.

Speaking of rates, the Treasury market didn’t show a big reaction on Friday to the government’s 2.1% gross domestic product (GDP) estimate for Q2, which was slightly above average third-party estimates. The 10-year yield did move up toward 2.1% from lows of near 2% earlier in the week, but it wasn’t a real break-out. There was some marginal steepening of the yield curve, but the three-month yield is still trading several basis points above the 10-year yield. 

News From Beyond

Investors expect tasty tidings from Beyond Meat when it reports earnings this afternoon after the bell, assuming stock performance is any indication. Shares rose to new highs above $235 late Friday, compared with its $25 initial public offering price (IPO) earlier this year.

The stock has become a darling of the Millennial set, according to the Investor Movement Index®, or the IMX, a proprietary, behavior-based index created by TD Ameritrade designed to indicate the sentiment of retail investors. Millennials tend to buy the things they know, and that includes both BYND and Uber Technologies Inc UBER in recent months. 

Betting against the company around earnings time didn’t work earlier this summer when BYND last reported, as the stock jumped about 100% after executives said 2019 full-year sales would be $210 million, about 2% above Wall Street’s expectations.

This time out, third-party consensus is for a nine-cent loss in Q2 for BYND, on revenue of $52.71 million. There are no year-ago comparisons because BYND wasn’t public a year ago. The company’s market cap topped $14 billion on Friday, which means a lot of people have a lot of money invested in BYND eventually finding a way to make its business model profitable. 

However, one thing investors might want to consider being careful about is when something goes straight up with hardly any pullback. BYND kind of stabilized between mid-June and mid-July, but it’s been on a tear since then and really hasn’t suffered any kind of downturn since going public.

Like most new things, it can be easy to get caught up in the excitement, and IPOs are no exception. Sometimes investors confuse a company brand with its business. In other words, you may love the product, but that doesn’t necessarily mean you have to love the stock, too. So far, loving both BYND’s brand and its stock has worked for people who climbed on, so we’ll see this afternoon if they were right to send shares shooting higher into the company’s latest financial news.

Beyond BYND, so to speak, earnings season so far is what Barron’s calls a “mixed bag.” About 44% of S&P 500 companies had reported as of Friday, with 76% beating Wall Street’s estimates on earnings and 61% posting better-than-expected revenue results. The five-year average for earnings beats is 72%.

However, the S&P 500 is still on track to show a 2.6% decline in Q2 aggregate earnings, Barron’s noted. That’s about the same as the Q1 decline, and would be the first time since 2016 that earnings fell two quarters in a row. Ironically, stocks are up about 20% year-to-date even as earnings sputter, but that might go back to what we said last week about the market not wanting to “fight the Fed.”

Some of the key earnings reports this week include Apple Inc AAPL, Verizon Communications Inc VZ, Under Armour Inc UAA, and Chevron Corporation CVX.

Small Talk: Last week, the Russell 2000 Index (RUT) of small-cap stocks finally made a good showing after months of sideways trading. It even had one big day where it rose more than 1.6%. Whether this means small-caps are waking up from their long slumber is anyone’s guess, but those who picked small-caps to break out over the last few months probably feel disappointed. The RUT is about flat since mid-April, compared with a 4% rise since then in the S&P 500 Index (SPX). One factor that might be helping small-caps at this point is the dollar rally. Sometimes small-caps can find support from a stronger dollar because these companies tend to be less exposed to the export market. A firm dollar often makes U.S. products more expensive overseas and can hurt big multinational firms. 

VIX View: Volatility died back down late last week after a brief rally, and the Cboe Volatility Index (VIX) struggled to stay above 12. It fell below 12 at times last week, but quickly bounced back. The 12 level has been an interesting one because the VIX has had trouble going through it. If we do break below it convincingly, it’s possible that might cause some worries that people are taking the overall situation in the market a bit too lightly, raising concern about the possibility of a quick move back the other way. 

Popularity Contest: With July almost over, it’s a good time to review what sectors topped the leaderboard so far this month and which ones lagged. It’s also a good time to ask why that might have happened. It probably comes as no surprise that Technology kept up its long run at the top so far this month with gains of more than 4.6% through midday Friday. What may be a surprise is the sector that’s nipping at Technology’s heels: Financials. This one has been a conundrum for several years now, and it’s way too soon to say the banks have their mojo back. However, a few more months like this could put Financials back in the swing of things. Stronger than expected  earnings from some of the major banks, along with signs of booming consumer health, probably helped Financials in July.

Other sectors high on the monthly leaderboard included Consumer Discretionary and Industrials, while the low guys on the totem pole were Utilities, Health Care, Real Estate, and Energy, all of which are often looked at as “defensive” sectors that people tend to flock to when times are tough. The mix of strength across many of the so-called “cyclical” sectors is good to see if you’re bullish, because cyclicals tend to do well when the economy is in decent shape.

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