Earnings Extravaganza As Investors Digest United's Losses, Await Intel And IBM

With inauguration in the rear-view mirror, Wall Street returns today to the business at hand: A long list of earnings reports and the latest word on unemployment claims.

We’ll get to earnings below. First off, weekly initial jobless claims offered a little good news and some bad. On the negative side, they’re still too high at 900,000, and above many Wall Street estimates. The good news is that last week’s big number got revised downward slightly. This metric just stubbornly refuses to fall, but maybe if more states come out of lockdown we’ll see improvement in coming weeks.

The market scored fresh record highs yesterday for every index, with the Nasdaq (COMP) up an amazing 2% after impressive earnings from Netflix Inc NFLX that helped propel the rest of the FAANG stocks. Those companies remain the gorillas on Wall Street. The excitement about yesterday’s inauguration and hopes that President Biden can push through another stimulus package seem to have spilled over today. It also seems positive that media reports said Amazon.com, Inc. AMZN has offered to help the Biden administration with Covid vaccine distribution. AMZN knows a thing or two about logistics. 

A little data came in too, with December housing starts and building permits both beating analysts’ expectations. So that also might be helping the market early on. 

Volatility continues to cool. The Cboe Volatility Index (VIX) has fallen back below 22, but remains above the historic average of around 20. VIX futures remain in contango, meaning forward prices are higher than the spot price. If you look toward spring, VIX futures are above 26. This is a possible warning sign that some investors see a bumpier road ahead. 

Earnings Parade Marches On As Biden Takes Office

The earnings engine keeps chugging up the hill today with two major railroads—CSX Corporation CSX and Union Pacific Corporation UNP—reporting. Then there’s Intel Corporation INTC and IBM Common Stock IBM in a double play for the Tech sector this afternoon. INTC could be an interesting one, as the company recently announced a new CEO who analysts think can guide the company through some of its production challenges (see more below). 

Having said all that, let’s be clear: Everything else could take a back seat to events in Washington over the next few weeks as investors look ahead to big changes in policy and outlook from a new administration. Even on his first day in office, President Biden signed executive orders putting the U.S. back in the World Health Organization and the Paris Climate agreement, moves that could have Wall Street impacts over time for sectors like alternative energy, pharmaceuticals, and health insurance. 

Biden is also likely to try and loosen the previous administration’s immigration policies, though political analysts say that’s not his top priority. Many large corporations have traditionally welcomed immigration as a source of workers and also as a factor that can keep down wages. This isn’t a political column, but the new administration might have to walk a tightrope here because so many Americans remain out of work due to COVID-19.

Meanwhile, the Energy industry took a blow with one of President Biden’s first acts as he revoked a permit for the Keystone XL Pipeline, which continues to be a political football through three presidential administrations. Maybe the impact will get blunted a bit by crude continuing to gain ground, reaching nearly 11-month highs yesterday above $53 a barrel. Energy stocks have been blowing away many other sectors lately on hopes the vaccines could speed the path back to a normal economy. 

Biden outlined a “theme” for each of the coming days. Today is “COVID” and tomorrow is “Economic Relief.” Monday is “Buy America.” It’s definitely a different feeling in Washington, whatever your politics are, and the effects could definitely be felt on Wall Street, which has rallied already since Biden’s election in part on hopes for more stimulus. 

So consider keeping your eye on this because new administrations often try to push the gas pedal hard in their first year when they think they can get the most done. Think of healthcare with President Obama and tax reform with President Trump. Both of those were first-year initiatives. The question many are asking is how much of the “unity” both parties have been pledging recently will make its way to the House and Senate chambers. It should be interesting to watch, whatever happens. 

What Else Is Lifting Stocks? Rising Target Prices

Getting back to the markets, we’ve mentioned valuation a lot lately—mostly to point out that the S&P 500 Index (SPX) is at historically high levels on a price-to-earnings basis and some analysts are fretting about possible overbought conditions. 

It wouldn’t be fair to bring up valuation and not add that plenty of analysts apparently see more potential upside for many of the biggest stocks. That’s been evident this week in price target raises for companies like Tesla Inc TSLA, NFLX, and Alphabet Inc GOOGL. 

All of those stocks got some traction Wednesday in part due to those target increases from Wall Street, which helps explain why high-profile large-cap growth companies led the way in yesterday’s rally. NFLX might have earned those higher targets with its incredibly strong earnings, but keep in mind that TSLA, GOOGL, and the other FAANGs that rose yesterday all still have to report. Higher expectations from Wall Street could mean a bigger hit if their earnings fail to impress. 

That’s just one reason investors need to be careful, especially with indices at all-time highs. The market environment has been a bit of a two-edged sword with those highs accompanied by bounces every time things pull back. If you’ve been playing the ‘buy every dip’ game for the last few years, your success has probably been in many ways unparalleled. 

Still, whatever’s going on with “animal spirits” and the overall market, every company has its own fundamentals to consider. That means if you own individual stocks, you always have to keep that in mind. Take INTC, which is expected to report this afternoon. This stock rocketed from below $30 to nearly $70 between 2016 and 2019, only to now be struggling in the $50s due to manufacturing issues that have made it fall behind competitor Taiwan Semiconductor (TSM).

Last year, INTC was forced to delay rolling out mass production of its next-generation fabrication process until at least late 2022, further widening the advantage TSM has gained, Barron’s recently noted. Intel already pays TSM to produce chips, but the company may seek to expand that partnership or try and find capacity elsewhere. Investors are waiting for answers to those questions on the earnings call later today, but it just points up that whatever phase the market is in, no company is immune from problems.

On the subject of problems, there’s also United Airlines Holdings Inc UAL, which reported last night. The problems it’s experiencing extend to the entire industry due to the pandemic’s impact, which cut worldwide passenger traffic to levels last seen in 2003. UAL posted its fourth-consecutive quarterly loss, and said it expects Q1 revenue to be down 65% to 70% compared with the same period of 2019. Shares fell nearly 2% in pre-market trading. Boeing Co BA is coming up next week and analysts are looking for more insight into cost cuts and customer demand metrics.

CHART OF THE DAY: FAANG REVIVAL. After a short slumber, the NYSE FANG+ Index ($NYFANG—candlestick) showed life yesterday as it gapped up reaching a new high at around 6693. For a while it was trending up along its 25-day moving average (blue line) but yesterday’s action put it well above that support level. Data source: Ice Data Services. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Tough Audience: We’re entering the heart of earnings season, so it’s time to remember a pattern seen so often recently. Investors can be hard to please, to say the least, and might punish companies even when they meet or exceed Wall Street’s expectations—just ask anyone who holds shares of JPMorgan Chase & Co. JPM after it absolutely demolished analysts’ projections but lost ground in the market last Friday. 

In some cases, there may be “whisper numbers” going around that some had hoped a company would meet. In others, the actual earnings might look fine but guidance might not please everyone. Even an offhand remark from an executive on an earnings conference call can sometimes spoil what otherwise would have been a strong day, if you remember what happened to Caterpillar Inc. CAT a few years ago. With so many stocks at or near their highs, any company that fails to meet expectations is vulnerable to getting a knuckle sandwich from Wall Street.

Biden’s First Steps on China Awaited: Since we mentioned CAT, it’s probably time to consider the Biden administration’s policy on trade and its potential impact on companies like CAT with a big presence there. For now, Biden says he’s keeping former-President Trump’s tariffs, and faces calls from both sides of the aisle to stay tough on Beijing. On the other hand, there are companies in the U.S. being hurt by tariffs and by having less access to China’s huge market, so there’s that to think about. Though the first phase of the trade deal signed last year by the countries seems to have gotten agricultural trade back into gear, many industries remain caught between the trenches in this long trade war. 

It might be interesting to get CAT’s perspective on trade relations when it reports next week. The company said in its Q3 earnings call that it had strong demand in China for its construction segment that quarter and that it expected China construction demand to grow in coming quarters. 

Not All Boats Lifted: One sector that sat out yesterday’s rally was Financials. This segment of the market has cooled off lately and it looks like that could be due partly to the recent flattening in the 10-year yield, which had been on a tear for about a month. The yield ticked up slightly early Thursday, pivoting around 1.1% after flirting with 1.2% earlier in January. Overall, bank earnings looked good but not great. The best takeaways are that some of the reserves set aside for credit losses got removed, and that loan activity and trading looked strong in Q4.

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

Photo by Chris Liverani on Unsplash