The U.S. stock market took on a positive tone in early trading as investors and traders hope for another stimulus deal from Congress by the end of this week and as they digest better-than-expected results from Walt Disney Co DIS.
Continuing the trend of generally stronger-than-expected corporate results, DIS shares were up 6.6% this morning after the global theme park and media company reported earnings that beat expectations after the closing bell Tuesday. Although the company’s revenue came in below forecasts, Disney saw its subscription services pass the 100-million-subscriber mark, and when you exclude one-time items the company ended up making a per-share profit when analysts were expecting a loss.
The results have been encouraging to the wider market because if DIS, one of the companies hardest hit by the coronavirus because of the cancelation of live sports and the closures of its theme parks, can still please investors then there may be more hope than thought for other companies.
In more disappointing corporate news, Bank of America BAC downgraded Apple Inc. AAPL amid its high valuation. It could be worth watching whether more downgrades follow for other high-flying FAANG stocks, which might dampen an important part of the market’s rally. In general, possible downgrades to AAPL and other “big-tech” companies wouldn’t be the traditional “this-company-is-in-trouble” variety—far from it. They’d performed quite well during the pandemic. However, some analysts are merely questioning whether, from a valuation standpoint, the recent rallies in their share prices have gotten a little over their skis.
Investors are closely watching the debate in Congress over the next coronavirus stimulus plan as well as the number of new coronavirus cases. It may also be worth watching Treasury yields, as the Treasury Department continues to shift to longer-dated debt securities, potentially pushing rates on that debt higher.
Teeter Totter Trading
Stocks took a bit of a seesaw ride on Tuesday, with all three of the main U.S. indices spending time below and above the unchanged line. But in the end, all three managed to close in positive territory.
Democrats and Republicans hadn’t reached an agreement on another round of stimulus, but Wall Street apparently was optimistic about something getting done. Market participants have been hoping for another round of stimulus checks and extra unemployment aid that they hope will underpin consumer spending, a key factor in corporate performance.
Speaking of corporate performance, investors have generally been cheered by an earnings season that has largely gone better than analysts were expecting. Around 83% of the more than 350 S&P 500 Index (SPX) companies that had reported by Tuesday morning had beaten earnings estimates, according to Reuters, citing IBES Refinitiv data.
Green Shoots Recovery Continues, Slowly
The economic recovery seems to be continuing to take two steps forward and one step back. A step back came on Monday as construction spending numbers were weaker than expected, falling 0.7% in June when a 1.3% gain had been expected in a Briefing.com consensus. The construction spending number is particularly interesting, as it seems to run counter to action on the homebuilders’ front—the S&P Homebuilders Select Industry Index ($SPSIHO), for example, rose to new all-time highs after cratering this spring.
The news was better from two reports from the factory floor. We talked about Monday’s better-than-forecast Institute for Supply Management’s July manufacturing index yesterday. On Tuesday, factory orders for June rose 6.2%, a full percentage point ahead of the 5.2% that had been expected. It could be interesting to see whether the July factory order numbers can maintain that pace of gains considering the resurgence in coronavirus cases.
Investors had some relatively good news on the coronavirus front yesterday. The U.S. reported fewer than 50,000 new cases for the second day in a row. Although the easing is a welcome sight, the continuing number of new cases domestically continues to be alarming, and it is hobbling the nation’s economic recovery.
Yellow Light for Risk-On Trade
With the backdrop of the continued pandemic and the dithering in Washington about a new coronavirus relief bill, and despite the gains in equities, it seems that market participants were also looking for safe-haven investments on Tuesday.
Demand for U.S. government debt increased, pushing yields on longer-dated Treasuries lower. With the yield on the 10-year note well below 0.6%, the Financials sector struggled, ending the day as one of only two SPX sectors in the red.
Meanwhile, gold posted another record high. Worries about the coronavirus-hit economy have polished the allure of the safe-haven investment. Low-interest rates and a weakening U.S. dollar have also added to its shine. Low rates reduce the opportunity cost of holding non-interest bearing gold, and a lower greenback makes dollar-denominated gold more appealing to those holding other currencies.
And then there’s the “i word”—inflation. Though the warnings of impending inflation—beginning over a decade ago—haven’t really panned out, the unprecedented levels of fiscal and monetary stimulus in 2020 have many investors suggesting that this time we could actually see a return of inflation.
Over the longer term, a return of stronger economic growth while interest rates are very low could prove inflationary if bottlenecks in supply coupled with greater demand lead to higher prices.
The silver lining is that the current demand for gold isn’t all about fear. It seems that safe-haven buying is just a part of gold’s rally, with support also coming from longer-term inflation fears and negative real interest rates.
CHART OF THE DAY: TRYING TO GET OUT OF A RUT. The Russell 2000 (RUT—candlestick) is still playing catch-up. While the small-cap index is above its 200-day moving average (purple line) it’s going to have to move above its June high of 1537 if it wants to catch up with some of the broader indices. Data source: FTSE Russell. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Cloud Computing Spending Soars: Investors have been flocking to Tech-related stocks in recent weeks as they appeared to want exposure to equities but also the relative safety of stable mega-cap companies (though no investment is truly “safe”). They’ve also been drawn to Tech stocks because of how the pandemic has accelerated demand for e-commerce and cloud services. Numbers from market research firm Canalys shed more light on the booming cloud market. During Q2, global spending in the cloud infrastructure services market grew by 31% to $34.6 billion, the firm said. That marked the largest quarterly expansion in dollar terms, as the pandemic spurred demand for online collaboration and remote working tools, e-commerce, remote learning, and content streaming, Canalys said.
MSFT, AMZN Cloud Revenue Growth Drops: Despite the growth in overall spending, the big two cloud service providers actually saw their cloud revenue growth numbers decline. In their most recent quarterly reports, revenue from Microsoft’s MSFT Azure cloud business rose 47% year-over-year and Amazon Inc.’s AMZN Amazon Web Services revenue gained 29%, down from 64% and 37% growth, respectively, in their comparable 2019 quarters. What gives? Well, for starters, as businesses get bigger, the rate of growth tends to fall off. So a slowdown in growth shouldn’t be too big of a surprise, and it’s been happening for both companies’ cloud services business since before the pandemic.
Why the Disconnect? With so much extra spending on cloud services during the pandemic, it can still be a bit of a head-scratcher as to why cloud revenue growth would decline during the most recent quarter for MSFT and AMZN. For one thing, it seems like demand from some industries wasn’t so great even as it increased from others. Amazon’s CFO Brian Olsavsky said during a conference call that cost-cutting in hospitality and travel businesses have weighed against growth in cloud computing demand for video conferencing, gaming, remote learning and entertainment. He added that AMZN has actively been trying to help cloud customers save money by, for example, helping them scale down usage where it makes sense. MSFT CEO Satya Nadella said companies are increasingly using pay-as-you-go with Azure. Another issue, pointed out by Canalys, is that cloud spending growth rates have been constrained by a slowdown in large projects as the economic outlook weakened and companies sought to make existing IT assets last longer.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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