(Monday Market Open) Earnings season shifted into first gear Monday as Citigroup (NYSE:C) posted better-than-expected results and saw shares rise in pre-market trading. A host of bank earnings take aim at Wall Street over the next few days, but this looks like a nice way to start the journey.
Citigroup’s earnings per share came in 14 cents above third-party consensus, with revenue a little higher than expected. A lot of the beat consisted of gains from C’s investment in Tradeweb, an electronic trading platform. That helped offset declines in the company’s Investment Banking and Fixed Income and Equity Markets revenues, C said in a press release. Without Tradeweb, earnings per share would have beaten by just two cents.
However, you can’t fault the company because it took advantage of an opportunity with Tradeweb, and for the most part, this looks like a nice way to get earnings season underway. Shares of C are up just a little, which goes back to what we’ve been saying about how if you beat, you’ll get rewarded modestly.
With several big banks reporting tomorrow and Netflix (NASDAQ:NFLX) on Wednesday, the question is whether this early strength can sustain itself. The question could become, “What’s next?”
Though it’s the first day of earnings season, data from thousands of miles away also swam into the picture today with China reporting 6.2% gross domestic product growth in Q2. That’s down from 6.4% in Q1, and the most sluggish quarterly growth for the country in at least 27 years, media outlets reported
That sort of growth sounds pretty good on the surface despite the historic weakness, but keep in mind that China’s government is providing lots of economic stimulus. Without that, things might have been worse. Softness in China isn’t something U.S. investors necessarily want to take lightly, since the economy there is the engine for so much economic growth around the world.
Still, the news might have ironically helped markets in Europe overnight, as stocks rose amid hopes of further stimulus from China. Some of this could potentially spill over into the U.S. session and it might be a good idea to keep a lookout for any possible announcements from Beijing about new efforts to prop up the economy there.
In corporate news outside of earnings, it’s Prime Day for Amazon (NASDAQ:AMZN) today. The event, which lasts 48 hours and covers 18 countries, might provide insight into U.S. consumer demand. How much are consumers going spend during Prime Day? More than $6 billion, analysts said. That would be a 46% jump from a year ago, but stay tuned to see the final results get tallied.
Hot Weather, Chilly Earnings Environment
The way stocks finished the old week at record highs and low volatility heading into earnings season, you might think everyone expects Q2 results and guidance to go just fine. We’ll have to wait and see, but it wouldn’t be too surprising if we look back in a few weeks and wonder what people were thinking.
Many Wall Street analysts expect year-over-year earnings to fall, starting with some of the major banks reporting this week.
It’s also possible that company executives could paint less than ideal pictures about how they see demand and sales shaping up the rest of the year as the economy continues to operate under a tariff-related shadow and slowing manufacturing numbers. None of this would usually pair up with stock market rallies and volatility drops.
Concerns could begin to build as the week goes on if earnings don’t meet already low expectations. Remember, the market has built in a low bar for this reporting season. Companies that surpass Wall Street projections might get slightly rewarded, but companies that miss low projections could see their stocks get slaughtered. The same could go for companies that give pessimistic outlooks.
The real wild card as earnings start isn’t just what the numbers tell us; it’s also what executives might say. A couple of scenarios seem possible. We could hear CEOs say their companies are making money and can continue at the current pace, but that they don’t expect to see a great expansion from here. Or they can say business has been good but they don’t think it can continue at the current pace. That second scenario is the one to consider looking out for, because if enough executives say it, the underlying message to investors would be that economic growth might be slowing.
It seems unlikely, based on recent data, overseas economic performance, and the Fed’s concerns about “uncertainties” and “crosscurrents” in the economy, that we’ll hear lots of companies say things are awesome and they think it can get even better from here. You can’t rule that out for a handful of firms, naturally. To hear it from a lot would be a surprise.
Volatility Reading Out Of Touch?
With all this in mind, it’s pretty surprising how volatility sank going into the last days of the old week. The Cboe Volatility Index (VIX), which functions as the market’s most well-known “fear indicator,” dropped below 13 to approach its lowest levels of the year. It was above 16 just a few weeks ago. The low volatility suggests some investors are preparing for a summer snooze in the markets and maybe more upside, and volume faded to end the week.
Low volatility and record highs in stocks—with the S&P 500 (SPX) closing above 3000 for the first time—suggest a lot of optimism. However, consider keeping an eye on VIX as the week goes by, because earnings could help tell the tale. Already, things look a bit different early Monday as VIX climbed slightly, though it’s still below 13.
Citigroup started off the bank earnings today, but tomorrow is really the big day as JP Morgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC) and Goldman Sachs (NYSE:GS) all get set to report before the opening bell. In many ways, things still seem stacked against big banks as earnings season approaches. Mortgage rates continue to fall and the Treasury yield curve remains inverted.
Despite all that, it’s possible we could see solid earnings growth from some major banking firms in Q2, according to third-party consensus estimates. This might speak to the impressive way that many bank CEOs are managing these tough times with expense cuts and new revenue sources.
The question is what bank leaders see going forward. They’ve done a great job cutting costs, for the most part, but you can only cut costs so much. If business continues to contract and pressures from weak overseas economies build, the big banks could be in a tough place. It’s also been a very difficult trading environment, which hurts big banks that have large fixed income, commodity, and stock trading divisions. Earnings could fall year over year for several of the major banking names, analysts said.
Checking Health Care’s Pulse With J&J
Another company that investors should really consider watching Tuesday morning is Johnson & Johnson (NYSE:JNJ). The company’s name got into the headlines last week for all the wrong reasons as Bloomberg reported that the U.S. government is pursuing a criminal probe into whether JNJ lied to the public about the possible cancer risks of its talcum powder
Even before the stock fell on those headlines, pharma firms were under pressure from news that the Trump administration dropped a proposal that would have nixed rebates from government drug plans as part of an effort to bring prescription drug prices down. That plan would have eliminated the rebates that drug makers pay to pharmacy benefit managers working with Medicare and Medicaid to negotiate drug prices for buyers such as health insurance companies.
With the rebate rule off the table and the administration still looking for a big win on drug pricing, investors appear worried that whatever comes next will hurt the drug companies. The biggest worry, according to Barron’s, is about a proposal known as the International Pricing Index model, or IPI, which Trump put forward last October.
The IPI proposal would link the price that Medicare pays for drugs to the prices paid overseas. Americans are generally charged far higher prices for the same drugs as foreign buyers. Drug companies oppose the IPI plan
With JNJ poised to be the first major pharmaceutical company to report, their conference call suddenly looks like it might be very interesting. There are a lot of possible implications on this drug pricing issue, and they could deliver the first insight. Anyone who trades Health Care stocks at all might want to consider tuning in.
Data Lag, But Fed Fills In
There’s not a lot of data ahead this week, but arguably you could say who needs any after Fed Chairman Jerome Powell’s testimony to Congress, where he basically made it clear the Fed will probably cut rates later this month. Also, Chicago Fed President Charles Evans said Friday that “a couple rate cuts” are needed in order to boost inflation.
Retail sales for June come out tomorrow morning, and analysts expect a 0.2% rise, down from 0.5% in May, according to Briefing.com. Also, keep in mind that the core Producer Price Index (PPI) for June that came out Friday was a bit hotter than analysts had expected. The next set of Personal Consumption Expenditure (PCE) prices now possibly becomes more important to consider watching, since it’s the Fed’s preferred inflation gauge and it’s generally been lagging consumer and producer prices. However, PCE data won’t come out till late this month.
With so much going on this week, that VIX reading below 13 looks like it could get threatened. The odds seem higher that VIX could pop back up rather than staying in summer snooze territory, but we’ll have to wait and see how things shake out
Figure 1: A MAN AND A MARKET. Any doubt that a single person can have an outsized effect on the entire market arguably vanishes with a look at this intraday chart of the S&P 500 (candlestick) and 10-year Treasury yield (TNX) over the Tuesday to Wednesday timeframe. Look at the jump in stocks and the drop in yields early Wednesday right after Fed Chair Jerome Powell’s testimony went public. Data Source: Cboe Global Markets, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Impatient for Recess? Not so Fast: If you were like a lot of kids (we won’t mention any names here), you probably remember squirming at your desk waiting for recess to begin. The same thing is happening with Congress right now, with legislators hoping to be out of town by the start of August. One thing standing in the way, potentially, is a showdown on the debt ceiling, and that could have market impact if it’s not resolved over the next two weeks. The U.S. Treasury warned it could run out of funds by early September, in which case it might be unable to continue the so-called “extraordinary measures” that have been in place since the government ran up against the old debt ceiling a while back.
If Congress can’t agree on a deal before leaving town, that could potentially help lead to another government shutdown and pose major uncertainties for the stock and Treasury markets. Remember, the debt ceiling is an artificial barrier imposed by Congress, and several years ago there was concern that without a lift, the government’s ability to pay debt-holders could be in danger. That’s where the market implications lie. In other words, it could be a volatile couple of weeks in Washington, and on Wall Street.
Value Equation: With the S&P 500 Index’s (SPX) 12-month forward multiple trading slightly above the historic average, investors might be hearing about the market potential for so-called “value stocks.” However, there was an interesting article in Barron’s a week ago questioning whether the “value” thesis is still relevant. Value stocks had what Barron’s calls a “long bust” over the last decade or so. In the two decades through 2006, value stocks beat the overall market by 1.1 percentage points a year. Over the last 12 years, value stocks have lagged the market by 2 percentage points a year. While it’s tempting to read that as a hint that value could be due for a comeback, Barron’s said, it actually might not be so cut and dry.
The outperformance of growth stocks vs. value stocks over the last decade or two is closely correlated with huge gains in the Technology sector. Investor excitement in Technology appears to continue, with Technology again the leading sector so far in 2019 and outpacing all sectors over the last three years. Low interest rates, low dividend yields, and index investing also have contributed to value’s struggles, Barron’s noted. Still, it’s easier now to find “value” names, with 67 of the S&P 500’s components recently trading at price/earnings ratios below 10, which is three times as many as five years ago.
Beyond the Banks: Bank earnings hog the headlines this week, but other sectors also get some time in the earnings spotlight over the next few days. Tuesday looks like a big day for transportation stocks, with both CSX (NASDAQ:CSX) and United Continental Holdings (NASDAQ:UAL) scheduled to report, according to Briefing.com. Last Friday, the Dow Jones Transportation average, which had been lagging the broader market, had a nice boost. Coming up Wednesday, investors get the first big report from the FAANGs as Netflix (NASDAQ:NFLX) lights up the screen. There’s also word Wednesday from a key player in Health Care as Abbott Laboratories (NYSE:ABT) steps up to the plate. Things stay busy as the week continues with companies like Honeywell (NYSE:HON), Union Pacific (NYSE:UNP), Microsoft (NASDAQ:MSFT) and American Express (NYSE:AXP) all on the calendar. If you haven’t already, consider buckling that seatbelt. It’s going to be quite a ride.
Good Trading