Caterpillar, Pfizer, 3M Earnings Come In Better Than Expected, With Microsoft Straight Ahead

After stumbling to start the week, it looks like Wall Street is trying to get back on its feet this morning. Major indices—which recovered some of their losses in the last hour yesterday—made up more ground in pre-market trading despite fading stimulus hopes and more shutdowns due to COVID-19.

Maybe a fresh batch of earnings can help wipe out yesterday’s ugly memories. It’s a full day, with three of the biggest Health Care firms reporting this morning. Then Microsoft Corporation MSFT leads a host of companies after the close (see more below). 

Another Tech company reporting today is chip firm Advanced Micro Devices, Inc. AMD, which made headlines this morning with its agreement to buy rival Xilinx, Inc. XLNX for $35 billion in stock. That’s the second major chip sector merger and acquisition (M&A) news in the last week, following Intel Corporation’s INTC move to sell its flash memory business to a South Korean firm.

Things are moving in the chip sector, and this deal today by AMD is likely to heat up the data center competition between it and INTC. This sector could look completely different by the end of the year from where it started. 

Health companies reporting today include Pfizer Inc. PFE, which gave an update on its COVID-19 vaccine. Around two-thirds of the more than 40,000 people enrolled in late-stage clinical trials have been dosed, and PFE plans to apply for Emergency Use Authorization (EUA) approval from the U.S. Food & Drug Administration (FDA) in late November.

Those are the bare bones, anyway. Perhaps PFE’s call will provide more color. It’s been a while since one of the major pharma firms has been in the spotlight this much, though it’s unclear how much of an impact the vaccine might have on PFE’s future earnings and revenue.  

Getting back to the financials, results so far today look mixed. PFE reported slightly better than expected earnings per share, but Eli Lilly And Co LLY missed analysts’ estimates. Earnings from 3M Co MMM looked pretty good. Meanwhile, Caterpillar Inc. CAT also had a nice quarter from a “beat the Street” perspective, and its shares have been slowly but surely plowing ahead lately. 

However, it’s important to keep results from all these firms in context. Most are down from a year ago, including a 23% revenue decline at CAT which the company attributed to “lower end-user demand for equipment and services.” Then again, considering the year we’ve had, it’s probable sales will be lower year-over-year for just about everyone whose company isn’t named Zoom Video Communications Inc ZM or Peloton Interactive Inc PTON. 

CAT has major exposure to China, whose economy has been emerging nicely from the pandemic, so check for any color they might add on business there during the call. CAT shares moved a bit lower after the earnings release, which is hard to figure out since its report looked solid and it said it expects better demand in Q4 than in Q3. 

Again, with the big Industrial firms, it’s the conference calls that stand out.  Executives often face tough questions from analysts and might explain their outlook and current business atmosphere in more detail. Many companies, including CAT, still aren’t offering formal guidance. 

There’s some data ahead this morning, too. Consumer confidence is key to watch heading into the holiday season. Wall Street consensus is for a relatively solid September headline figure of 101.9, according to research firm Briefing.com. That’s about even with August, but consider looking deeper into the report to get a sense of how consumers feel about the near future. 

U.S. durable goods orders rose more than expected in September, another good sign. And crude oil ticked up a little bit this morning but remains on the defensive after yesterday’s steep losses. A hurricane headed for the Gulf of Mexico seems to be helping crude this morning, but prices usually roll right back after the storm passes and the U.S. price is still below $39 a barrel. Tomorrow brings the latest U.S. weekly supply and production update.

Boeing Waits In The Wings

Things were rough for Boeing Co BA even before COVID-19. The company’s 737-MAX was grounded way back in March 2019, and remains in the hangar. BA sold exactly zero new airliners in September and suffered more 737-MAX order cancellations. 

Boeing has booked 67 orders so far this year, but it’s suffered 448 cancellations for the MAX and dropped another 602 orders from its backlog because the company isn’t sure it can complete the sales with so many airlines in financial trouble, the Chicago Tribune reported. 

Then early this week, more headwinds swirled. China’s government said Monday it will impose sanctions on U.S. military contractors including BA’s defense unit and Lockheed Martin Corporation LMT for supplying weapons to rival Taiwan. 

All this means there’s not an incredible amount for investors to hang their hats on going into BA’s Q3 earnings report tomorrow. Shares recently traded near 2020 lows at around $160, down from north of $400 in early 2019. How times have changed for this once high-flying company. 

It doesn’t look much better from a financial reporting point of view. BA is expected to report a loss of $2.47 a share in Q3, analysts said, sharply worse than the positive $1.45 earnings per share it booked a year ago. The average Wall Street revenue estimate is $14.49 billion, down more than 27% from the same quarter last year.

If there’s anything to hang that hat on, maybe it’s recent headlines that Europe’s top safety regulator cleared the MAX for use, and American Airlines Group Inc AAL plans to relaunch the airplane at the very end of this year. 

Optimism isn’t exactly bubbling up on Wall Street ahead of tomorrow’s BA earnings report. A Credit Suisse analyst wrote that “it’s difficult to see a substantial post-results rally except in the case of exceptionally better-than-expected results (or) forward commentary that can meaningfully alter the narrative.” 

A Quick Look Back

If you have the stomach for it, let’s take a quick review of yesterday. The S&P 500 Index (SPX) fell nearly 2% for its worst session in over a month. Interestingly, the SPX finished right at 3400, which was just below technical support at the 50-day moving average.

That 3400 finish did reflect a very late comeback attempt from the day’s lows. It could be interesting to see if stocks get any kind of bounce from that today. Also, the Nasdaq (COMP) didn’t fall as much as the SPX yesterday, which could be a sign of people coming back into some of the “stay-at-home” names in Tech.

The Cboe Volatility Index (VIX) climbed above 33 to its highest level since early September. A rising VIX often represents a warning signal, and it had stayed beneath the psychological 30 level for weeks. The sector map was a virtual sea of red Monday, with only a few stocks in the Health Care and Utilities sectors lighting up green. 

It all boils down to record levels of virus infections and investors pretty much throwing in the towel on any chance of a fiscal stimulus before the election. In fact, there’s talk that if we don’t get a jolt of federal money ahead of next Tuesday, it might be a long time coming, no matter which party emerges triumphant. There’s not a lot of optimism that a lame-duck Congress can accomplish much, so that could push things back all the way till after the inauguration.

Basically, investors saw that and started to recalibrate. They’d spent a few weeks putting some premium into stocks as it looked like Congress and the administration might come through, but that premium’s being pulled out. At a sector-level, Energy suffered the worst punishment with losses of more than 3% Monday as crude oil capsized. But some of the sectors that had been doing better recently like Financials and Industrials—areas that tend to do well when the economy strengthens—also got taken to the woodshed. 

Still Time For Stimulus, And Microsoft’s “X” Factor Worth Watching

This all sounds kind of gloomy going into the darkest, coldest months of the year, but remember, no one can predict how the political winds blow. There are seven days left for Congress and the president to agree on something, even if it’s less than what some investors had hoped. Things could turn on a dime if the skies become sunny in Washington and stimulus talk gets positive. 

Another positive factor could be earnings. This is a monumental week with Microsoft Corporation MSFT later today and four of the five FAANGS going on Thursday, including Apple Inc. AAPL. Earnings season so far has been far better than analysts had expected, but we’re only about 25% done. This week could get us to around 50% and give investors a much better sense of how corporations are dealing with so many challenges.

When MSFT reports later on, investors should consider closely watching the company’s guidance. Analysts expect strength as MSFT likely benefits from people working at home, and they’ll also be watching for any hint of how holiday Xbox sales might be shaping up. As always, MSFT’s Azure cloud platform growth will probably get close scrutiny from Wall Street.

CHART OF THE DAY: CHANNELING CRUDE SUPPORT AND RESISTANCE. After failing to break out above $42 to the upside on several occasions over the past couple months (upper blue line), WTI Crude Oil futures (/CL) have come under pressure, with chart watchers eyeing a possible test of the mid-$36 level (lower blue line), where /CL has found some support in recent days. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

GDP Watch is On: This week is all about earnings, but there’s some important data due Thursday. That’s when investors are set to get a first look at the government’s estimate for Q3 gross domestic product (GDP). It fell more than 30% in Q2, but analysts look for a big comeback in Q3. Research firm CFRA told investors they could expect around a 33.5% GDP gain on an annualized basis, followed by a Q4 advance of 6.0% and a 2021 gain of 5.4%. 

Needless to say, 33.5% growth isn’t something ever seen before, and even a full-year gain of 5.4% as CFRA sees for 2021 is the best in a long, long time going back to before the 2008 financial crisis. It probably needs to be taken in context, however, because the comparison to 2020 will likely be a pretty easy one. Also, keep in mind that the 33.5% gain is vs. the prior quarter, not the prior year. And Q2 saw GDP fall more than 30%. 

One Week to Go: Seven days ahead of the election, several sectors stand out as more likely to feel impact from the aftermath. These include Financials, Health Care, and Energy. All of these are often seen as more exposed to possible tax and regulatory changes in a changing political atmosphere. For instance, there’s widespread market belief that a “blue” Senate and White House would tighten pressure on drug company pricing, keep banks under a microscope and perhaps limit hydraulic fracking and add more environmental laws. From that sense, the historic belief is that Republican control favors those sectors and vice versa. 

Materials are another sector to keep an eye on, particularly if Democrats take control and appear to be on a path toward some sort of major infrastructure spend. Watch banks, too, which would presumably get a tailwind from any sign of rising interest rates on thoughts of more government spending. The dollar could continue to decline if that raises questions about possible inflation, and a weaker dollar tends to be helpful for multinational companies that have half or more of their revenue coming from overseas.

A Penny Saved...Remember those big jars of coins your parents or grandparents kept in the basement? Or the packets of sugar and butter your grandma might have quietly slipped into her purse at restaurants? An entire generation that grew up in the Great Depression developed a “saving” mentality. That was accompanied for some by a fear of investing, as the Dow Jones Industrial Average ($DJI) took nearly 25 years to fully recover (on an inflationary-adjusted basis) to the peak level before the 1929 crash.

While COVID-19 hasn’t had that kind of impact on stocks, it does appear to have people back in the saving mode, according to numerous media reports over the weekend. Those who received government stimulus checks or extra unemployment benefits last spring likely stashed the cash in the bank, economists said. While you never can conclude too much based on one weekend’s flurry of media reports, this isn’t necessarily the kind of news you want to hear as an investor.

Consumer spending drives the economy, and we’re heading into the holiday season, a time when many companies depend on shoppers to come out and spend. That was already in doubt thanks to the pandemic, and the recent wave of new virus cases could deal another blow. Many consumers might not get more able or willing to spend until unemployment gets much closer to normal levels, analysts warned, as uncertainty around the job market makes people nervous.

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

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