Key Earnings Week As Amazon, Boeing, Alphabet, Facebook Results All Expected

If the entire earnings season got stuffed into one day, we’d be just about done with breakfast. 

It’s been a nutritious one, with 79% of reporting companies coming in above expectations so far, according to FactSet. Still, lunch and dinner have to be served, and this week features about 25% of all S&P 500 companies sharing results. Things got off to a mixed start with energy firm Halliburton Company HAL reporting earnings per share that beat expectations but coming up short on revenue.

Earnings are roughly 15% finished, and optimism is starting to build that maybe things can turn out a little better than the goose egg many people had expected. That could help explain why stocks have a positive tone this morning. By the end of this Friday, 40% of earnings will be done, and we’ll have to wait and see what the tone is like by then.

Something else to consider keeping an eye on this week is the situation in Washington, D.C. The House is set to go on recess after Friday, and there’s still no budget deal. If that doesn’t get straightened out, worries could build about a possible government shutdown and the debt ceiling, which the Treasury secretary said last week needs to be raised.

One more thing to keep in mind as the week moves along is the European Central Bank (ECB), which has a rate decision scheduled for Thursday. An interest rate cut might be in the cards, analysts said, or at least some sort of new stimulus.

Iran Worries Still Simmering

Last week sputtered to a close as geopolitics sailed back into the picture. News at midday Friday that Iran seized a British tanker appeared to stir up some waves, and the S&P 500 Index (SPX) sank back after its early gains. The tanker situation hasn’t been resolved as of Monday morning, and that might be part of what’s giving crude a 2% boost. There’s growing concern about potential supply disruptions to the energy-rich Persian Gulf.

Going back to Friday, it looked like one of those times when the market’s been up a lot recently and people decided to take some risk off the table going into the weekend. What’s interesting is how crude only rose about $1 on the Iran news and volatility didn’t get much of a lift, at least initially. However, the Cboe Volatility Index (VIX)—the most closely watched “fear indicator”—did begin to climb more as Friday’s session advanced, finishing above 14. It had spent much of last week below 13. 

The tension with Iran is a reminder that outside events continue to play a role, and that goes beyond the obvious trade battle with China. U.S. stocks are arguably priced for perfection up here near all-time highs as investors anticipate a rate cut by the end of this month. However, a shaky first week of earnings, growing Brexit concerns, and a debt limit battle shaping up in Congress all could stand in the way of continued gains. So could any bad news on the China trade front or if the tensions with Iran get worse.

Miss on Earnings? Get Punished

With the first full week of earnings season behind us, the prediction made before earnings started appears to hold true for reporting companies: If you beat, you may be mildly rewarded, but if you miss, you are likely to get pounded. It’s the biggest overall trend, and we saw it with Netflix, Inc. NFLX and CSX Corporation CSX both taking a beating when they came up short, and Microsoft Corporation MSFT and some of the bank stocks only getting slight lifts when they surpassed expectations.

Last week’s batch of corporate earnings also appeared to show that consumers are spending money, but companies have a wide range of potential problems heading into the second half of the year. Industrial companies are likely to continue dealing with the impact of the U.S.-China trade war, and the market’s collective eye could also be focused on slowing growth for some key manufacturing data all around the world. Some of this could show up in earnings.

This week, investors are likely to focus on projections from chipmakers and what social media company executives have to say about the impact of government inquiries into privacy issues. Some of the key companies reporting this week include Boeing Co BA, Lockheed Martin Corporation LMT, Tesla Inc TSLA, Alphabet Inc GOOG, Facebook, Inc. FB, Amazon.com, Inc. AMZN, Intel Corporation INTC, Ford Motor Company F, AT&T Inc T, and Twitter Inc TWTR.

Silence is Golden This Week at the Fed

Though earnings pick up later this week, Fed speakers go into a short hibernation as the silent period begins ahead of next week’s Federal Open Market Committee meeting. There was a lot of scuttlebutt late last week after New York Fed President John Williams appeared to hint at a half-point rate cut, but that anticipation kind of dwindled Friday when the New York Fed walked back those comments, saying they were “academic” and not necessarily related to the meeting ahead.

The new week begins with CME Group futures showing investors firmly in the camp of expecting just a 25-basis point cut, with approximately 75% odds of that. Falling hopes for a 50-point cut might also have weighed on stocks toward the end of Friday’s session. A 75% chance doesn’t guarantee a 25-point cut, but typically a percentage this high so close to a meeting has proven correct in the past.

Looking at the data picture, existing and new home sales for June both come out early this week, but things get more exciting Friday when the government delivers its first estimate for U.S. Q2 gross domestic product (GDP) growth. At this point, analysts look for growth of just 1.8%, according to a consensus estimate from Briefing.com. That’s down from 3.1% in Q1, and would be the lowest quarterly GDP growth since Q1 of 2017. 

As economic growth slows, U.S. Treasury yields just can’t get it going. The 10-year yield finished the old week under 2.06% after climbing above 2.1% a few days earlier. These geopolitical tensions wouldn’t seem likely to help yields much, as situations like this often send investors fleeing into what they see as “defensive” investments like Treasuries (yields move in the opposite direction of the underlying Treasury note).

However, if investors were feeling cautious Friday, they didn’t show it through their choice of sectors. The so-called “defensive” sectors like Real Estate and Utilities were some of the worst performers of the day, while Industrials and Energy were among the few to rise.

On the plus side, transport stocks kept gaining Friday as another solid earnings report came in, this time from KC Southern KSU. That followed strong Union Pacific Corporation UNP results earlier in the week and raised hopes that trains and trucks remain full of goods, which can signal healthy economic demand. An earnings beat from American Express (AXP) late last week fell into the same category. The latest University of Michigan Consumer Sentiment report out Friday for early July rose from June.

Figure 1: STOCKS AND GOLD IN SYNC: Stocks (SPX - candlestick) and gold (/GC - purple line) spent parts of last week moving together, with both reaching significant highs recently. The Federal Reserve is expected to cut interest rates, which could be favorable for gold and stock prices, which don’t always rally together. Data Source: S&P Dow Jones Indices, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Political Tensions Could Help Gold: The S&P 500 index (SPX) hit an all-time high last week but mixed earnings reports and political tensions toward the end of the week may have contributed to the index pulling back by Friday. Gold, which has been rallying this year, also hit a significant high last week, with the shiny metal trading above its six-year high of $1,400 per ounce. Seeing stocks and gold trade in sync (see Figure 1 above) isn’t unusual in a low interest rate environment, and as we head towards the next Fed meeting, it might be a good idea for investors to keep an eye on both these markets. Will easier monetary policy continue to favor stocks and gold, or one over the other? 

Home Builders Hitting Snags? In general, homebuilder stocks have had a fairly strong year, with most companies up so far in tandem with the broader market. While the housing market has made substantial strides since it crashed a decade ago, progress has been slow. Both housing starts and building permits for declined in June for the second straight month. Builders are grappling with a tight labor market and a shortage of land on which to build, which has made it hard for them to keep up with the high demand. Tighter supplies usually leads to higher prices, so potential buyers may be shut out, even as borrowing costs remain fairly low.

NVR, Inc. NVR—up 45% year to date and one of the largest homebuilders in the U.S.—reported quarterly results Friday that beat revenue and earnings expectations. The company’s new home orders increased 6%, but the average price of those homes declined, showing the market may be favoring less expensive homes over luxury homes lately. Next up for signs of how homebuilders are faring, consider watching for PulteGroup, Inc. PHM earnings before the opening bell tomorrow.

Bad News? No Problem: For anyone astonished to see Boeing Co’s BA shares rise in post-market trading Thursday immediately after the company announced a nearly $5 billion charge due to its troubled 737-MAX program, it provided a good example of a common occurrence in the market that might be worth remembering. While BA's news was bad, it also wiped its slate clean in some ways. How big a charge the company would take was a major question going into the company’s earnings later this week, and the question got answered ahead of time. It wasn’t good news, but some analysts wrote in notes Friday that it could have been worse, and they also pointed out that BA intends to get the plane back into the air in Q4, earlier than some had expected. 

As one analyst pointed out on CNBC, you don’t even have to go too far back to find the last time a relief rally occurred for a stock in the case of bad news people had expected. Facebook (FB) shares rose earlier this month after FB got fined $5 billion by the Federal Trade Commission (FTC) for its privacy practices. Does all this mean bad news is good? Not exactly, but maybe when it comes to companies facing trouble, the lesson is to hope for the best but prepare for the worst.

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