As Earnings Season Rolls On, Many Companies Have Beaten Expectations

After returning from a long weekend, investors and traders appear to be gearing up for a busy week on the earnings front as they continue awaiting a potential trade deal between the United States and China.

In general, earnings season is turning out to be better than analysts expected, although many had low expectations. As of Thursday, Reuters reported that nearly 80% of the 77 S&P 500 (SPX) companies that had reported results have beaten consensus. Still, SPX profits are expected to have fallen 1.7% year-over-year for the January-March reporting period, the news agency reported.

In commodities markets, oil prices hit their highest point this year on expectations that the United States will announce the end to sanctions waivers for buyers of Iranian oil. The move would come at a time when supplies have already been tightening because of sanctions on Iran and Venezuela, as well as OPEC-led cuts. The surge in oil prices is helping support the Canadian dollar. 

The earnings season continued Monday with Halliburton Company HAL and Kimberly-Clark Corp KMB reporting better-than-forecast earnings and revenue. Companies also reporting this week include The Coca-Cola Co KO, United Technologies Corporation UTX, Microsoft Corporation MSFT, Exxon Mobil Corporation XOM, Facebook Inc FB, Amazon.com, Inc. AMZN, and Twitter Inc TWTR.

One report that is likely to be closely watched this week is that of Boeing Co BA. Investors likely are waiting for BA to provide more clarity on aircraft orders and production after the crashes of two 737 Max aircraft put the program under close scrutiny. 

The fleet of Max aircraft is grounded and some airlines have talked about cancelling future orders. Investors could have a lot of questions for BA on how that might affect the company’s financial picture for the rest of 2019. Maybe the biggest thing to consider regarding BA earnings is how these cancellations may have affected its order flow. 

Economic data expected this week include new home sales, durable goods orders, and the final April reading for the University of Michigan consumer sentiment index. Perhaps the most highly anticipated report comes on Friday with the government’s first estimate for Q1 gross domestic product. (See more on GDP below.)

Industrials Shine

The three main U.S. indices finished in the green Thursday, with the tech-heavy Nasdaq (COMP) just barely scraping out a positive finish and the SPX and Dow Jones Industrial Average up more strongly. 

The Industrials sector made up the day’s biggest winner, rising more than 1.1% amid positive earnings reports, including from Honeywell International Inc HON, Union Pacific Corporation UNP and United Rentals, Inc. URI.

The sector may have also gotten some help after China’s commerce ministry said there has been progress in working out the text of a U.S.-China trade deal. Among other Industrials companies, shares of Caterpillar (CAT) and BA were up slightly. 

Because of their exposure to China the two companies are often seen as proxy trades for the ups and downs of the negotiations between the world’s two largest economies as they work to end a trade war that has weighed on Wall Street for months amid worries about global economic growth.

Economic Data Also Help

The market also got a lift on Thursday from economic data that added to a picture of a U.S. economy that, while not going gangbusters, is still showing signs of health.

U.S. retail sales for March came in stronger than forecast, notching a 1.6% gain when a Briefing.com consensus showed expectations of a 0.9% rise. Anything pointing to the health of the American consumer can be particularly important given the huge percentage of gross domestic product that is driven by consumer spending. 

In other economic data, initial U.S. jobless claims hit their lowest level since 1969, coming in at 192,000 compared to a Briefing.com consensus forecast of 208,000.

Figure 1: RELATIVE CALM?: Though the Cboe Volatility Index (VIX) starts the week with a pop above the 13-handle, the fear index has been drifting lower in recent weeks, and is quite subdued by historical standards. A lot of fear seems to have left the market after the Fed’s dovish pivot and amid optimism on a U.S.-China trade deal. But the VIX declines recently are especially notable as trading volumes have been low. Thin volume tends to exacerbate market volatility not subdue it. Data Source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  
Healthcare Checkup: Somewhat surprisingly, Thursday’s best performer in the $DJI was UnitedHealth Group Inc UNH. The company, as well as the Healthcare sector, has been under pressure recently amid worries about potential legislative changes out of Washington that could affect the industry.The concerns ratcheted up after UNH’s CEO spoke against “Medicare for All” in a UNH earnings conference call and said healthcare price inflation has been slowing. Perhaps the bounce on Thursday came as some investors and traders might have been thinking the stock had gotten low enough to offer an attractive buying opportunity. UNH shares finished more than 2.2% higher while the Healthcare sector in general gained 0.14%.

Waiting for GDP: The Bureau of Economic Analysis is scheduled to take its first crack at Q1 GDP this week, and a Briefing.com consensus forecasts a reading of 1.9% annualized growth. Prior to that release, investors can turn to the Atlanta Fed’s GDPNow model for GDP estimates. The latest forecast, from Friday, showed estimated real seasonally adjusted annualized GDP growth of 2.8%. If the actual GDP forecast comes in that strong, which would be well ahead of the Briefing.com consensus, then the stock market could react positively, especially with inflation muted at the moment. The next GDPNow update is scheduled for Thursday, a day ahead of the government report. 

A Look at Housing: With the market closed last Friday, investors could be forgiven for not noticing some housing market data that came out that day. Annualized numbers for housing starts and building permits for March came in below expectations, with 1.139 million starts and 1.269 million permits compared to Briefing.com consensus estimates of 1.247 million starts and 1.3 million permits. “Single-family starts and single-family permits both declined month-over-month in March and were down noticeably year-over-year, suggesting the likelihood of ongoing supply constraints at more affordable price points unless more affordable existing home inventory comes on the market,” Briefing.com said.

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