Apple, Boeing And The Fed: A Full Day Ahead As Earnings Help Recharge Wall Street

When it’s Fed day the market sometimes stays pretty static as investors await a decision from Washington.

Wednesday might be the exception. Things are running hot, with major indices higher in pre-market trading as investors digest earnings from Apple Inc. AAPL and Boeing Co BA. These two behemoths both surprised to the upside, with BA’s numbers looking especially strong. BA shares rose more than 5% ahead of the opening bell, while AAPL shares climbed 4.6%.

Earlier this week, Caterpillar Inc's CAT earnings appeared to raise concerns about the industrials and how they might respond to weakness in China. The good news coming out of AAPL and BA could help mitigate those concerns. That doesn’t mean they’ll go away completely, but maybe they’re not as bad as people thought.

BA’s report, in particular, might hold hopes for the overall market. The stock is often seen as a proxy for global economic performance, China included. Many companies reporting so far this earnings season have mentioned Chinese economic slowing as a drag, but the BA earnings might suggest that at least some U.S. multinationals can do fine anyway.

Many overseas markets rose earlier Wednesday, while crude continued to inch higher and gold also headed up (see chart below). The Fed comes out with its decision early this afternoon, but futures prices point to essentially no chance of a rate change.

Apple, Boeing Spread Cheer

After what seemed like one piece of bad news after another over the last few months—including lowering its quarterly revenue projection in early January—Apple delivered some positive tidings after Tuesday’s close. Earnings and revenue for the company’s fiscal Q1 both came in above third-party consensus expectations, with earnings per share of $4.18 beating analyst estimates by a penny and revenue of $84.3 billion also just above expectations of $84 billion.

It wasn’t all rosy, as iPhone revenue came in just under the Street’s expectations and fell 15% from a year ago. Still, revenue in the closely watched services segment rose 29% year over year. 

Probably less than shocking was AAPL’s weak performance in China last quarter, considering that AAPL had already warned investors about revenue there being worse than it had previously expected. Sales in the Greater China region fell 27%, while Europe and Japan sales also ticked lower. However, sales in the Americas rose 5%, the company said. 

During its conference call, executives reiterated that two headwinds remain weaker economic conditions in China and people waiting longer to replace their iPhones. Another headwind is dollar strength, AAPL noted.

These factors might be eating into AAPL’s guidance. Apple expects revenue of $55 billion to $59 billion for the March quarter, below the average consensus estimate of $59.98 billion, according to FactSet. Analysts expect the number of iPhones sold in the March period will decline at the steepest level in the company’s history, The Wall Street Journal reported.

It seems like some of those negatives got shaken off in pre-market trading. It might have helped that AAPL CEO Tim Cook said on the call that he believes there’s “a bit more optimism in the air” on U.S./China relations, according to media reports. The two countries are entering another round of trade negotiations this week. There also seems to be a sense in the analyst community that maybe some of the worst AAPL news has already been digested, judging from some of the analyst reports out today.

The news from BA was less checkered. There’s not much to look at cross-eyed here. Earnings of $5.48 shattered the third-party consensus view of $4.58, while revenue of $28.34 billion also came in well above expectations and was up 14% year over year. Maybe the most important thing to note about BA is that profit margin was up 12% year over year. That is massive, and that might be what people are drawn to right away.

BA also forecast 2019 earnings per share well above analysts’ expectations, and sees record commercial airplane deliveries. That might be read as a sign of continued firm demand for commercial air travel.  It could be interesting to tune into some of BA’s call with analysts to get executives’ take on the global economy and what’s driving all this enthusiasm for new airplanes. The company’s defense business also looked good.

Up Next: Fed Decision

The Fed is expected to issue its decision on interest rates at 2 p.m. ET today. Typically, there doesn’t tend to be a lot of price movement in the major indices on days when the Fed looms. However, with the futures market predicting virtually no chance of a hike, perhaps the pending decision might not be as big a deal as, say, a month ago.

One thing that could potentially cause some volatility later is Fed Chairman Jerome Powell’s press conference. Many investors are probably curious to hear what sort of tone Powell might take and whether it will correlate with somewhat dovish statements that both he and other Fed officials have been making since the last Fed meeting. Until this month, the Fed was arguably among the primary sources of volatility in the markets as many investors worried that four rate hikes last year might have rates positioned too high even as the global economy slowed. 

Now, with few investors expecting another hike until much later this year, if at all, according to futures prices and surveys (see more below), the Fed has become kind of secondary in many investors’ thinking. That could change, naturally, depending on circumstances and data. Inflation data recently has appeared pretty benign, so it might be interesting to hear what the Fed has to say about possible reasons behind that.

Powell’s language at the press conference might help investors get a better sense of where he stands not only on future rate action, but also on how the Fed might handle its balance sheet going forward. Media reports since last Friday have hinted that the Fed might slow the runoff of its bond holdings. If that’s the case, there’s a chance it could help keep borrowing costs down. There’s some debate in the analyst community about whether or not the Fed might provide a balance sheet strategy update today.

Treasury Yields Fall Ahead of Fed

Speaking of borrowing costs, they fell again Tuesday (see chart) as some investors once again seemed more willing to embrace “defensive” parts of the market. The 10-year yield slipped to 2.7%, down from near 2.8% at its high earlier this month. While the lower yields appeared to weigh on financials, the industrial sector topped the sector leaderboard Tuesday ahead of BA earnings and as investors seemed to appreciate results from Lockheed Martin Corporation LMT and 3M Co MMM.

Most major indices fell on Tuesday, though the Dow Jones Industrial Average ($DJI) managed slight gains amid strength in components like Pfizer Inc. PFE and MMM. Earnings reports from both seemed to get some love despite including a few disappointing elements. Lately, it seems like companies are getting forgiven more often than not for guidance or financial misses.

A lot of companies—including MMM and AAPL—have warned investors about a slowdown in China having an impact on their businesses. However, shares of both have been rising.  Could it be that at least some investors are starting to feel that China weakness might already be built into some companies’ stock prices? We’ll have to wait and see.

More earnings lie ahead. Microsoft Corporation MSFT, Visa Inc V, and Tesla Inc TSLA are all scheduled to report after the close today. Tomorrow brings MasterCard Inc MA, General Electric Company GE, and Amazon.com, Inc. AMZN, among others. Also on tap Thursday: Ferrari NV RACE, which might give a sense of how the high rollers are spending their money these days.

The week doesn’t get any less hectic when Friday rolls around. We wake up that morning to the January payrolls report (see more below).

Figure 1: Easing Off: U.S. 10-Year Treasury yields (candlestick) have eased over the last week heading into today’s Fed meeting. However, gold (purple line) has shot up to over $1,300 an ounce, which some analysts say might be related to uncertainty over Brexit. Data Source: CME Group, Cboe Global Markets. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Jobs Data Loom Friday: Amid all the earnings and today’s Fed meeting conclusion, it’s also a big week for economic data. Arguably there’s none more important than Friday’s January payrolls report, especially since today’s Q4 gross domestic product (GDP) estimate was delayed by the shutdown (it’s unclear when that will be ready, but media reports suggest an average third-party estimate for GDP growth of 2.6%). 

Anyway, as payrolls approach, we’re coming off a huge job gain of 312,000 in December, along with average wages rising 3.2% year over year. That wage rise was up from 3.1% the prior month, and might bear watching because continued wage gains—while good news for workers—sometimes spark inflation worries. For January, analysts expect payroll growth to ease back quite a bit from December, to just 160,000 according to a Briefing.com survey. It’s unclear if the jobs report might reflect any impact from the long government shutdown, but it seems possible. Average hourly earnings are seen rising 0.2% month over month, Briefing.com said, down from 0.4% in the prior report.

Month on Positive Path: With just today and tomorrow left in January, the year seems like it’s off to a relatively strong start for U.S. stocks. That’s especially the case if you look beyond the big three indices to some of the less closely followed ones, like transports and small caps, that some analysts believe can sometimes tell more about the health of the underlying economy. Going into Wednesday, the Dow Jones Transportation Average ($DJT) was easily outpacing the S&P 500 (SPX), up more than 8% year to date. It had another strong day Tuesday despite a drop in the SPX.  

So far this quarter, there have been some surprisingly positive earnings and optimism from major airlines. In their earnings calls, none of the airlines have been mentioning any worries about tariffs or crude oil prices. Some rail and shipping companies have also had a good month on the charts, perhaps a sign of U.S. consumers remaining in relatively good health despite the government shutdown.

Investors Assess Rate Hike Odds for 2019: A rate hike would seem pretty unlikely today, judging from how the futures market is shaping up, but that doesn’t necessarily mean we’re out of the woods for the year. A CNBC survey of investors released Tuesday showed 78% expect at least one rate hike before the end of 2019. In addition, 48% expect a hike next year. However, now there’s also a column in the survey for possible rate cuts, with 17% of respondents expecting the Fed to ease rates this year and 37% expecting that next year. One thing investors surveyed by CNBC agreed about was today’s Fed meeting. There are 100% expectations for no rate moves.

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