Earnings Feast: Bring a Plate With Healthcare and Caterpillar in Morning, GOOGL And AMD Later

A three-course earnings meal is on the table today, so bring your appetite. 

Health Care serves the appetizers this morning as Pfizer Inc. PFE and Merck & Co., Inc. MRK grab the spotlight, with a little Caterpillar, Inc. CAT on the side for protein and some 3M Company MMM for a snack. This afternoon’s main course is Alphabet, Inc GOOGL GOOG soup, with dessert (and perhaps a shot of espresso) by Starbucks Corporation SBUX.

Tomorrow’s menu is even more packed, but investors might still have a sweet taste in their mouths after Monday’s big gains that saw things climb across the board despite very little news. Just the idea that some economies in Europe and here at home might start opening up apparently was enough to see buyers saunter back in to follow up last week’s strong close. The strength appeared to spill over into pre-market trading Tuesday.

A 3.7% gain for Financials carried the day Monday, but all sectors did well. One bullish development was seeing some investor interest in the Industrials and Materials sectors, both of which have been struggling amid weak demand. Earnings calls from CAT and 3M (MMM) this morning could shine more of a light on the industrial economy around the world, while Advanced Micro Devices, Inc. AMD this afternoon promises a look at the chip sector, which has been leading things higher for a while now.

Shares of PepsiCo, Inc. PEP, CAT, MMM, and PFE all climbed in pre-market trading as investors digested their earnings. The gains in CAT came despite the company missing analysts’ expectations, though that was partly due to a special charge. 

About 75% of CAT’s factories are still open because they’re deemed essential, and the stock was down 22% for the year going into today. The company did OK in the first part of Q1 but then things turned south. The stock had done so poorly all year that maybe investors see earnings as a reprieve, judging from how shares acted early Tuesday. 

PEP missed on earnings but beat on revenue, and investors seem focused on the revenue beat for now. MMM and PFE all beat analysts’ estimates, and PFE maintained its guidance. MMM had a nice quarter due to its home safety products, and pulled its guidance but kept its dividend.

Consumer confidence is the key data to watch today, coming out right after the open. Analysts expect a headline reading of 86.5 for April, according to Briefing.com, down from 120 in March and 132.6 in February. That would be the worst in about six years. 

Slumbering Banks Wake Up

For once, the market did well Monday without Information Technology twirling the baton.

Sure, the chip companies resumed their sizzling performance, but some of the software, cloud, and device companies didn’t do as well. Apple, Inc. AAPL and Microsoft Corporation MSFT both got left behind, for instance, and so did the high-flying FAANGs in general. It’s just one day, not a trend, and you have to consider how far AAPL and MSFT have already come. Still, those two have such huge market caps (above $1 trillion each), that if they lose steam, it could have an outsize impact on the major indices (see more below). 

That’s the “glass half empty” take on Monday’s action. The glass half full is seeing how well the downtrodden Financial sector did and how stocks climbed despite crude getting slammed again. Banks provided the leadership, with JP Morgan Chase & Co. JPM having a big day and Bank of America Corporation BAC and Citigroup, Inc. C also doing well. The rally got kicked off by Deutsche Bank Aktiengesellschaft DB, whose shares surged 8% after it announced it would report a Q1 earnings beat. That excited people, and so did news of European countries like Spain and Italy talking about reopening. 

You don’t want to see the tech names fall apart, but Monday’s session shows that we don’t always have to hop on their back to carry us along. However, we’re so reliant on four or five huge tech firms that it would be good to see Financials take some leadership in this market. 

For those of you keeping score at home, Financials were one of the worst performing sectors since the pandemic began, and seeing major banks put aside billions against possible loan defaults dented the industry’s profits in Q1. Could we be seeing some pent-up demand for this sector? One day isn’t enough to really say, but it is a good lesson to investors how a rally in Financials can translate right into a market-wide rally across the S&P 500 Index (SPX). Regional banks helped power the Russell 2000 Index (RUT) higher to start the week, too. 

Another thing that’s given banks problems is the pressure on rates as the Fed continues its bond buying and investors seek fixed income in hope of protection. The Fed meeting starts today, and some analysts say there’s no expectation for rate hikes until 2023. That wouldn’t be unprecedented when you consider it took until late 2015 for the Fed to raise rates again after lowering them to effectively zero during the 2008 financial crisis. Zero rates can help companies climb out of the deep hole they’re in, but they also raise debt worries and put pressure on profit margins for banks. 

Retail also had a big day Monday, helped by hopes that reopenings can give struggling stores a lift. Though lots of caution remains, it was a hopeful sign that bond prices and volatility both fell to start the week. The dollar, another asset people have clung to recently as the economy weakens, stepped back a little, too. Small-cap stocks continue to gain a little ground.

In fact, stocks that would benefit most from an economic reopening led the way higher on Monday. MGM Resorts International MGM and Carnival Corporation & PLC CCL both climbed more than 8%. The Gap Inc. GPS and Kohl’s Corporation KSS gained 12.9% and 17.7%, respectively. Tesla, Inc. TSLA shares jumped 10.1%. This is a nice change of pace, but one day is never a trend. 

Typically, stocks trade in a narrow range during Fed meetings, but that might not be the case today. That’s partly because the Fed has already done so much to address the crisis that many market participants don’t expect much news out of the meeting when it finishes tomorrow. Still, don’t count out the chance that the range could narrow a bit later today and tomorrow, maybe easing back some of the early exuberance.

All this talk of the economy reopening in some states but not others raises questions, and in a sense could make things more disjointed than they already are. More on that tomorrow. 

Crude’s Monday Plunge Shrugged Off

Stocks rallied Monday despite plunging crude, and crude did pop back slightly early Tuesday from its worst overnight lows.

When crude is so weak, there’s a point it gets down to where it doesn’t matter if it’s trading at $11, $13, or $15. No one in the Energy sector is making money at these levels. If you look out onto the futures curve into September and beyond, though, prices suggest a chance of demand coming back. It might be too late for Diamond Offshore Drilling, Inc. DO, a small-cap company that filed for Chapter 11 bankruptcy protection.

Tomorrow’s weekly government crude supply and production report could shed more light and maybe give investors a sense of whether U.S. prices have a chance to fall further as the June contract expiration starts closing in later next month. Normally you wouldn’t pay such close attention to the week-by-week crude supply situation if you’re a typical stock market investor. That has to change for now, seeing how weak crude torched stocks early last week.

To some extent, however, major crude firms divorced themselves from the current soft crude market on Monday, with Exxon Mobil Corporation XOM and Valero Energy Corporation VLO doing well. The June crude futures contract has a few more weeks as the front month but then it goes off the board, so it’s a matter of getting through this time period. Hopefully sometime soon after that economies start opening back up and demand starts creeping higher, which might take some pressure off of the storage situation.

CHART OF THE DAY: WHAT YOU SEE...Some of the best-performing stocks in the S&P 500 Index (SPX—candlestick) since the market hit its highs in mid-February have been the so-called “FAANGs” (purple line), which outperformed the SPX easily over that time. These stocks, including Amazon, Apple and others reporting this week, make up a big percentage of the SPX by market-cap, which means its overall performance may be considered worse than it looks if you consider it on an equal-weighted basis rather than a value-weighted one. Data Sources: S&P Dow Jones Indices, Nasdaq. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Value Judgment: A lot of times you’ll hear analysts and fund managers talk about “value stocks,” meaning stocks of companies that tend to have good bones but for one reason or other are trading below their true worth. This can happen if investors overlook potential new innovations in a company’s pipeline, changes in management that bode well, an evolving business model, or a company that’s had problems but the stock is down to levels that punish it too much. Some analysts see “value” companies congregated now in the Financial and Industrial sectors, as well as in the small-cap space.

These days, value stocks are like a certain famous comedian—not getting much respect. It might seem strange at a time when so many worry about indices coming back too far, too fast, that more investors aren’t running to value names, but one reason could be pandemic-related. With so many companies pulling guidance and the near future so uncertain, it’s hard to measure value. A downtrodden stock might not deserve to be so low, but who can really tell? This leads many investors to flock where pockets are deepest and the walls against uncertainty are highest, which is why so many of the big tech stocks are doing well and value remains “unvalued” by many at this juncture.

Birds of a Feather: When so many people flock to one part of the market, you risk getting blinded by focusing too closely on the broader indices. For instance, the SPX was down around 17% from its February record as of the end of last week, but the median stock was trading 28% below its peak, Bloomberg reported Monday, citing data from Goldman Sachs Group, Inc. GS. That’s in part due to the outstanding performance recently of the market’s heavyweights, which tends to make the index look better than if you weighted it equally by each component. The five largest companies make up 20% of the SPX’s market capitalization, exceeding the 18% level the measure reached in March 2000 at the height of the dot-com boom. This raises concerns about narrow market breadth leading to possibly lower long-term returns and loss of momentum, GS warned. Investors are putting a lot of faith in a few behemoths to keep this rally going, and if those darlings of Wall Street falter, their outsized capitalization could have an outsized impact on the index. 

Depth Gauge: Consider this week a huge test of the idea that the biggest stocks set the tone. Four huge companies—Amazon.com, Inc. AMZN, Apple, Alphabet, and Microsoft—are due to report. Together, these four have a mind-boggling market cap of $4.634 trillion as of Monday. The market cap leader, in case you’re keeping score, is MSFT at $1.33 trillion, followed by AAPL at $1.23 trillion and AMZN at 1.2 trillion. GOOGL brings up the rear at a mere $874 billion. These valuations aren’t far off where the four stocks were back at the peak before coronavirus, which shows just how much money people are throwing at them as they look for cash-rich, well managed companies in hard times.

TD Ameritrade® commentary for educational purposes only. Member SIPC.