Earnings Extravaganza: More Big Banks Report This Week, Along with Tesla, Netflix and Other

(Monday market open) Welcome to the first full week of Q1 earnings season. Today’s a relatively quiet day on the reporting calendar, but it’s the proverbial calm before the storm.

Solid earnings from three of the country’s largest banks fueled financials sector gains Friday, but the broader market spent most the day in the red. That didn’t prevent major indexes from logging a third-straight positive week, and the S&P 500® index (SPX) remains near 2023 highs. The Dow Jones Industrial Average® ($DJI) posted its fourth-straight positive week.

A host of earnings reports are on tap this week, but remember a lesson from Friday: When the “mega-cap” tech stocks sneeze, the rest of the market often catches a cold. Softness in the mega-caps early Friday helped keep pressure on the major indexes, and this small handful of companies could continue shaping overall direction.

That said, it’s been a solid start for Q1 earnings. Seven S&P 500 companies reported Friday and all of them surpassed analysts’ average earnings per share estimate, while six of the seven did so on revenue, according to Briefing.com.

Morning rush

• The 10-year Treasury note yield (TNX) rose 1 basis point to 3.54%.
• The U.S. Dollar Index ($DXY) ticked up to 101.64.
• The Cboe Volatility Index® (VIX) futures remain just above 2023 lows at 17.53.
• WTI Crude Oil (/CL) is down slightly at $81.97 per barrel.

There could be reason for caution as the new week begins. Fed speakers last week remained concerned about high inflation despite recent cooler data, reinforcing ideas that at least one more rate hike could be ahead. The 10-year Treasury yield climbed back above 3.5% early Monday, and crude oil prices set a new 2023 peak last week, rising above $83 per barrel. Retail Sales for March declined far more than expected and across most categories, suggesting consumer restraint that could eventually hurt company profits if it continues.

It’s almost as if we’re watching the baton get passed from inflation risk to recession risk. That’s one reason why it’s so important to watch company earnings outlooks as they report to get a sense of the economic landscape they see shaping up in the near future.

Eye on the Fed

The probability of a 25-basis-point increase next month was almost 88% as of this morning, according to the CME FedWatch Tool.

The Fed appears more concerned about inflation than financial stability, says Kathy Jones, chief fixed income strategist at Schwab. Remember, the Fed hiked rates at the last meeting despite turmoil in the banking sector with demand for funds at the discount window soaring. This means Treasury yields could remain volatile, especially as concerns grow around the debt ceiling debate shaping up in Washington, D.C.

Stocks in Spotlight

Bank earnings continue Tuesday with Bank of America (BAC) and Goldman Sachs (GS), and on Wednesday with Morgan Stanley (MS). All three big banks that reported Friday easily beat analysts’ estimates.

BAC: Back in Q4, BAC’s earnings surpassed analysts’ estimates thanks to higher interest rates even as investment banking took a hit. At the same time, BAC told investors it expected net interest income to decline sequentially in Q1, CNBC reported, so one thing to watch when BAC reports is just how big a headwind this actually was.

Also, like other banks in Q4, BAC added more reserves for possible credit losses, but at a lower level than JP Morgan Chase (JPM) and down from a year earlier. If BAC adds more than Q4’s $1.1 billion for this line item, some might interpret that as the company expecting a higher chance of recession.

When reporting Q4 results, BAC executives said they anticipated a “mild recession.” See if they change that wording. BAC has a massive consumer banking franchise, and it’ll be interesting to hear how that held up in Q1 as data toward the very end of the quarter pointed toward slower jobs and wages growth.

• Expected Q1 EPS (Analysts’ Average Estimate): $0.82
• Year-Ago EPS: $0.80
• Expected Q1 Revenue (Analysts’ Average Estimate): $25.13 billion

GS: Goldman is coming off a disappointing Q4 earnings report that was its worst since the pandemic, and more pressure could be on the way if analysts’ estimates are correct. Wall Street sees GS earnings per share falling sharply in Q1 versus a year ago.

Weak Q4 investment banking and asset management results weren’t too surprising considering some of the economic fundamentals, including high interest rates. But the company’s consumer banking business also suffered. The same rate backdrop likely continued to pressure investment banking industry, where merger and acquisition activity has been far quieter than a few years ago. This could mean more challenges for GS.

• Expected Q1 EPS (Analysts’ Average Estimate): $8.10
• Year-Ago EPS: $10.76
• Expected Q1 Revenue (Analysts’ Average Estimate): $12.79 billion

Smaller banks will also be under investors’ microscopes this earnings season, since that segment suffered the earliest impact of the crisis. Regional bank earnings to watch include M&T Bank (MTB) today and U.S. Bancorp (USB) on Wednesday, among others. Smaller and mid-sized banks have heavy exposure to the commercial real estate market, which is under pressure from pandemic-related changes to how people work and from rising interest rates.

What to Watch

Earnings rush week: Tomorrow is a smorgasbord featuring the two big banks along with quarterly reports from Lockheed Martin (LMT), Netflix (NFLX), United Airlines (UAL), and Johnson & Johnson (JNJ). Tesla (TSLA) is expected Wednesday.

Shares of both JNJ and LMT have underperformed the broader market so far this year, though JNJ recently got a boost after the company offered nearly $9 billion to settle a huge lawsuit related to the talc in its Baby Powder, which claimants allege caused cancer. Some analysts said this new higher offer could potentially end the lawsuit, Reuters reports. JNJ had some bad news late last month when it halted a late-stage study of its experimental respiratory syncytial virus (RSV) adult vaccine, according to Reuters. JNJ also ended a clinical trial for an HIV vaccine earlier this year.

One thing to watch when LMT reports is any update on F-35 delivery delays due to engine issues, Barron’s reports. Raytheon Technologies (RTX) supplies those engines to LMT. Shares of LMT are up sharply since early 2022, partly reflecting a big rise in the U.S. Defense budget over that period. But the stock recently got downgraded by Baird, which cited inflation, supply-chain, and profit margin pressure for the company, according to Barron’s.

NFLX has projected $8.2 billion in quarterly revenue, up 4%. Analysts expect a rise in subscribers of 2.26 million, increasing the total to 233 million, Barron’s reports. One thing to look for is whether NFLX’s move toward a lower-priced advertising-supported subscription tier  is starting to pay off.

Housing update: It’s a light economic data week, highlighted mainly by tomorrow’s March Housing Starts and Building Permits report. On the starts side, the number fell for months before February’s sharp jump to a seasonally adjusted annual rate of 1.45 million.

Building permits, often seen as an indicator of future demand for new homes, rose in February 13.8% to a seasonally adjusted 1.524 million. Some of February’s gains in starts reflected renewed vigor in single-family home building, which had generally been dropping over previous months. Still, multi-unit housing starts accounted for most of February’s increase from January.

For March, analysts expect starts to drop slightly to 1.42 million and permits to slip to 1.45 million, according to Trading Economics. The report is due an hour before tomorrow’s opening bell. 

Top rate: There’s growing belief among economists that we’re near the peak of the interest rate cycle, and evidence suggests that the Fed’s hikes helped cool the economy. What should investors consider doing if rates are topping out, and what could it mean for global markets? Find out in the latest Schwab Market Perspective.

CHART OF THE DAY: FIRST AND LAST: This chart maps year-to-date performance of the best-performing and worst-performing sectors. The S&P Financial Select Sector (IXM—candlesticks) is dead last so far this year, down 5%, but has inched up from its mid-March lows. The S&P Communication Services Select Sector ($IXC—purple line) is on top of the leader board with 23% gains, led by stocks like Meta (META) and Alphabet (GOOGL). Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Get ready for China GDP: If you stick around after today’s close, be on the lookout for key Chinese economic data due Monday evening U.S. time. Beijing is expected to report Q1 Gross Domestic Product (GDP) and Industrial Production numbers, and analysts expect GDP to rise 4%, according to Trading Economics. That’s below the government’s 5% annual goal, and, if it comes in as expected, might raise concerns about China’s reopening progress.

Don’t forget the debt: It hasn’t been in the headlines much lately, but the debt ceiling debate is expected to heat up in coming months, especially following Tax Day tomorrow. It’s after taxes are in that Treasury Secretary Janet Yellen is expected to give Congress a more specific deadline, says Michael Townsend, Schwab’s managing director of legislative and regulatory affairs. A default deadline should jumpstart efforts on Capitol Hill to address the issue in earnest, Townsend adds. In the meantime, the stalemate continues between the Republicans’ position that they will only support a debt ceiling increase that is paired with spending cuts and the Democrats’ position that they will only support a clean debt ceiling increase without any strings attached.

Shhh… As in other recent earnings seasons, company guidance may be just as important—or more—than the actual earnings numbers as quarterly reporting continues. In recent quarters, companies that missed Wall Street’s outlook forecasts have gotten punished. Meeting guidance isn’t necessarily time for the rally hats, however. It seems that’s the minimum standard for Wall Street lately. Beating some of the “whisper numbers” often means more to market participants, but it can be hard to know what those numbers are.

Calendar

April 18: March Housing Starts and Building Permits and expected earnings from Bank of America (BAC), Goldman Sachs (GS), Johnson & Johnson (JNJ), and Lockheed Martin (LMT).

April 19: Fed’s April Beige Book and expected earnings from Abbott (ABT), Morgan Stanley (MS), and Travelers (TRV).

April 20: March Existing Home Sales and Leading Indicators, and expected earnings from AlaskaAir (ALK), American Express (AXP), AT&T (T), Philip Morris (PM), Taiwan Semiconductor (TSM), and Union Pacific (UNP).

April 21: Expected earnings from Freeport McMoRan (FCX), and Procter & Gamble (PG).

April 24: Expected earnings from CocaCola (KO).

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

Image sourced from Shutterstock

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