Earnings Palooza: 20% Of S&P 500 Reports This Week, Including Apple, Tesla

Can you say, “earnings?” 

This week is earnings, earnings, and more earnings. Wednesday brings the triple crown when Tesla Inc TSLA, Apple Inc AAPL, and Facebook, Inc. FB all report after the close.

Company reporting hits a crescendo this week and next, accompanied by a mountain of data. The cherry on top is Wednesday afternoon when all those big names step to the plate and Fed Chairman Jerome Powell takes the mic following the Federal Open Market Committee meeting. It’s a lot to digest, and investors could have their hands full keeping up. 

In the background and sometimes the foreground, Washington continues to compete for Wall Street’s attention. Biden and company are making news every day, often with market implications. Last Friday’s word from Capitol Hill didn’t sound quite as bullish on the stimulus, which weighed on stocks as investors contemplated potentially seeing $1 trillion instead of $2 trillion injected into the economy. But it’s still early on that front. 

It’s also early to talk about this week’s data calendar, since there’s no important data today. As the week advances, however, we’ll get plenty. Some key reports include consumer confidence, durable goods, and a first look at Q4 gross domestic product (GDP). Meanwhile, a measure of German business sentiment dropped today, and that appears to be helping the bond market a bit this morning. Volatility is also higher, but so are stock index futures. Usually, when bonds are up it’s a warning sign. So the market is sending mixed pictures early on. 

Apple, Tesla, Lead The Week’s Earnings Parade

It’s not hard to pick a few earnings that stand out amid all the coming attractions and may set the tone with what they say. AAPL and TSLA could make for an interesting Wednesday afternoon. Maybe call them the “split twins,” since both were in the headlines last year for splitting shares. 

Everyone knows how TSLA stock has gone parabolic since then, but AAPL shares actually spent some time wandering in the desert after the split before picking up some momentum and recently powering to new all-time highs. Looking ahead to TSLA’s Q4 earnings report and conference call after the close Wednesday, investors are likely going to want to hear more details about production, especially after CNBC reported a planned 18-day shutdown of Model S and Model X lines in California. This might suggest the company isn’t seeing as high demand for those older lines as for newer models. 

With AAPL, focus is expected to be on the iPhone 12, which the company launched last fall. Analysts take different positions on how well AAPL did in Q4, with some saying it was good but not great and others saying the iPhone 12 launch was an amazing success likely to be reflected by earnings. We’ll find out Wednesday, but investors seem to be thinking positive. Shares of AAPL are up nearly 3% in pre-market trading today. 

Microsoft Corporation MSFT is another mega-cap reporting this week. Focus, as always, could be on its Azure cloud product which has been growing like a weed over the last few years but still appears to be trailing Amazon.com, Inc.’s AMZN cloud offering. Holiday Xbox sales also could get a close look from investors. 

And then there’s Facebook, Inc. FB, which is also scheduled to report Wednesday afternoon. Analysts are expecting a continuation of the ad revenue growth pattern, but they may be listening extra closely for any comments on the potential regulatory winds that have been swirling in recent days.  

Last week’s Tech earnings from IBM Common Stock IBM and Intel Corporation INTC didn’t really light the world on fire, so the market might be hoping for something warm and fuzzy out of Tech in coming days. 

Maybe Johnson & Johnson’s JNJ earnings seemed kind of ho-hum the last few years, but not any more. They’ll have a major spotlight tomorrow morning and probably a bigger audience than usual for their conference call, with lots of people hanging on any new word about their Phase 3 COVID-19 vaccine trial. The company’s been talking about having results soon. Could tomorrow be the day? We’ll wait and find out. Positive vaccine news pumped up the market last fall, so don’t rule out a possible boost to major indices if JNJ’s single-injection vaccine results impress. 

Adding everything up, about 20% of S&P 500 companies report this week. Some of the other big ones include AT&T Inc. T and McDonald Corp’s MCD, Verizon Communications Inc. VZ, and 3M Co MMM.  There’s so many company reports this week that some who’d normally get a lot of attention, like Starbucks Corporation SBUX, might get lost in the haze. 

So far, earnings have been better than expected. Going into earnings season, analysts had expected about a 7% year-over-year drop. So far, with 13% of S&P 500 companies reporting, the actual drop has been 4.7%, according to FactSet. There’s still a long way to go, but it looks like the trend seen over the last couple of years where earnings look better in reality than in Wall Street’s initial vision might be continuing.

Also, 86% of S&P 500 companies have reported a positive EPS surprise and 82% have reported a positive revenue surprise, FactSet said. That’s way above historic averages.

Two-Way Tech

Last week saw a split in the Tech group, especially Friday after old-school Tech behemoths IBM Common Stock IBM and Intel Corporation INTC reported. Both disappointed Wall Street, and their weakness spread across not only the sector but possibly to the entire market as stocks struggled to stay above the flat line to end the week.

At the same time, more money seemed to flow toward mega-cap Tech companies like AAPL and MSFT. Rising along with those were Adobe Inc ADBE and salesforce.com, inc. CRM, whose cloud divisions look strong compared to what people heard from IBM on Friday. It’s tough straits for IBM here. They made a big investment in cloud technology and it’s not necessarily paying off the way some investors might have hoped. 

Meanwhile, chip makers forged new highs throughout last week and AAPL and MSFT continued to grind upward ahead of their respective earnings. These fresh all-time peaks can be a double-edged sword for investors as earnings approach. One thing to remember is that when a company reports earnings and its stock is at or near historic peaks, the pressure can really be on to meet or exceed expectations. 

A stock that’s priced for perfection tends to do badly when perfection isn’t achieved in an earnings report. That’s a warning not just for shareholders of AAPL, which is scheduled to report Wednesday, but for a host of other companies reporting this week with their shares on a roll including D.R. Horton Inc DHI, Starbucks Corporation SBUX, Illumina, Inc. ILMN, Stryker Corporation SYK, and, of course, TSLA. 

Boeing Co BA is also on the docket this week, its first earnings report since getting the 737 MAX back in the air. Shares of BA and the airlines continue to get dragged as U.S. passenger traffic slumped after a brief uptick around the holidays.

The Fed meeting that starts tomorrow almost gets pushed to the background with all this earnings news swirling around. It’s hard to imagine them saying much of anything different, though obviously we’ll look for any observations on inflation.

CHART OF THE DAY: PAYING A PREMIUM. Nothing’s rallying quite like the small-cap Russell 2000 Index (RUT—candlestick). It’s now trading at around 1.37 times its 200-day moving average (blue line). RUT’s current premium to its 200-day MA exceeds even the one recorded in early 2000, which was close to 1.3 but never this high. Data Source: FTSE Russell.  Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

GDP Stands Out in Critical Data Week: You can almost pick and choose your favorite data  to watch each day, there’s so much on the way. Maybe most critical is the government’s first look at Q4 gross domestic product (GDP) Thursday morning. Q3 growth was an amazing 33.4% on an annualized basis as the economy rebounded from its spring collapse. Q4 could be more interesting, and we’ll talk about analysts’ estimates as we get closer. For a sense of how the economy performed overall, it’s helpful to have some earnings and economic data around, and not all of that is available yet for Q4. However, considering some of the recent employment and retail sales data, it feels like things might have slowed down a bit toward the end of the year for consumers, whose spending comprises roughly 70% of the overall economy. 

One thing economists seem pretty sure of is that overall 2020 GDP—which we’ll get a look at Thursday as well—was probably in the dumps and couldn’t match the 2.3% growth recorded by China. That country recovered more quickly from the pandemic, analysts say, because it focused on getting factories restarted very early on in the crisis. While the official U.S. government estimates arrive Thursday, the World Bank recently said the U.S. economy likely contracted 3.6% in 2020, but could rise 3.5% in 2021. 

Stairs and Windows: Since we talked earlier about how you can never be sure a selloff might loom, it might be helpful to think about moving averages. Specifically, about how high the major indices currently sit above their benchmark 200-day moving averages, which in many cases can serve as points of technical support on any downturn. It’s also helpful to know which indices have the most and least premium to their 200-day MAs. The winner of the biggest premium is...drumroll please...the Russell 2000 (RUT) index of small-cap stocks, which continued its rally last Friday. As of Friday, the RUT was trading at a hefty 1.37 times its 200-day MA (see chart above). As recently as late September, RUT was trading at a discount to the 200-day, which tells you a lot about its quick ascent as investors plowed money into smaller stocks expected to do better with stimulus thanks to their heavier exposure to the domestic economy. 

Following up in the premium sweepstakes is the Nasdaq (COMP), trading at 1.24 times its 200-day. The SPX is at 1.16 and the Dow Jones Industrial Average ($DJI) brings up the rear at 1.14. These premiums don’t necessarily tell you which indices are most vulnerable in a selloff, but do suggest that if things turn negative, small-caps and the Tech-dominated COMP might suffer more dramatically based on their current status vs. moving averages. 

Just a Reminder: In case anyone forgot, Friday reminded us that things can go down as well as up. Another thing to keep in mind is that old saying about the market climbing the stairs and falling out the window. Not that anyone’s necessarily predicting a big selloff, only that selloffs are common and eventually happen. It’s only a matter of time. 

When they do, it sometimes seems to come out of nowhere. Most years have at least a couple of 5% declines and it’s a rare year when there isn’t at least one 10% drop. It’s been four months since the S&P 500 Index (SPX) had anything close to a 10% pullback, which people commonly call a “correction.” That was when the SPX fell 9.6% between Sept. 2 and Sept. 23. It also suffered a more than 7% drop between mid- and late October. There’s been nothing really dramatic since then except on the upside, where the SPX is now up 18% from its Oct. 30 low.

If the recent rally has your portfolio looking a bit stock market heavy, don’t hesitate to go back in and make sure your allocations haven’t strayed too far from plan.

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

Photo by Erol Ahmed on Unsplash