Strong Earnings from Coca-Cola Start Week, with IBM on Way Ahead of Netflix Tomorrow

After four weeks of gains, what can Wall Street do for an encore? We’re about to find out as the earnings parade continues. 

Despite nice results this morning from CocaCola KO, the overall market seems to have lost some of Friday’s fizz. It’s not too surprising when you think about it, considering the amazing rally we’ve had. Nothing goes straight up forever. The same goes for Bitcoin, which took a sharp dive over the weekend along with other cryptocurrencies, though it’s coming back a bit this morning. 

KO looked like a bright spot early Monday, citing strong sales were strong for its classic product along with juices and sparkling beverages. It also reiterated full-year guidance. Remember to keep an eye on company guidance this earnings season, which hopefully we’ll see more of after many companies held back on it during the roughest days of the pandemic. 

Earnings drive stocks, and that’s why earnings season is so important. Will reality match expectations? The Financial sector did a pretty good job, and now we’ll see how the rest of the market did. This is a huge week and so is next. While individual stocks may not move immediately on quarterly results, the more important thing is getting a sense of company expectations. 

Can the Relative Calm Continue?

Monday comes after a leisurely finish to last week. Volatility eased and the closely-watched 10-year Treasury yield remained well off recent peaks. The Cboe Volatility Index (VIX) continued to pull its magic disappearing act, falling to nearly 16 by late Friday to stay near the lowest it’s been since pre-Covid Valentine’s Day 2020. It did pick up a bit Monday morning and is now back above 17. 

Though the VIX futures market is in contango, meaning later months trade higher than the current contract, it takes till late May to get above the 20 level in futures. That might suggest investors see relatively smooth trading waters ahead. We know how fast that can change, of course. 

Having said that, earnings season is off to a very nice start, and that can do a lot to ease minds—especially with current high valuations. It looks so far like analysts were way too conservative going in, though you have to be careful because earnings have barely started. Since last Wednesday, only four S&P 500 companies have actually missed the Street’s earnings per share expectations out of around 35 reporting. 

From Classics to Upstarts, Earnings Picture Expands this Week

Today’s calendar includes earnings from some “classic” companies like CocaCola KO and IBM IBM, but tomorrow brings a much more recent vintage when FAANG member Netflix NFLX reports its Q1 earnings. The company’s subscriber base, which blew past 200 million in blockbuster fashion last year during lockdowns, is once again expected to be front-and-center of the streaming giant’s quarterly report.

When Q1 numbers are released, analysts look for another wave of strong subscriber gains, even though NFLX keeps trying to temper expectations. NFLX forecast 6 million new subscribers as the quarter was unfolding, down from the 8.5 million it logged in Q4, but Wall Street seems to be bracing for a stronger showing. 

As we noted here on Friday, key Tech companies expected to report this week include IBM and Intel INTC. INTC earnings offer investors a chance to hear more about the global chip shortage, while IBM’s cloud business could be in the spotlight. Just a reminder that IBM’s shares got absolutely pasted when the company reported Q4 earnings, falling 7% after the fourth-consecutive quarter of revenue declines for the company. Cloud revenue also fell short of the Street’s expectations in Q4. The big question for IBM when it reports after the close today is whether it’s found a way to stop the revenue bleed. 

Other earnings reports to potentially keep an eye on this week include Johnson & Johnson JNJ, which of course is under a microscope after a pause in the use of its vaccine, Abbott Labs ABT, and Lockheed Martin LMT. Shares of LMT lost some of their altitude late last year amid worries that increased pandemic spending by the government might take the focus away from defense, especially with a Democratic administration coming into Washington. However, shares are climbing again now, and it might be good to listen in for executives’ viewpoints on the geopolitical situation.

Also, don’t overlook the communications sector, which sees two of its behemoths report this week when AT&T T and Verizon VZ open their books. VZ beat analysts’ estimates last time out, and focus again could be on capital expenditures and the rollout of 5G. With T, investors may want to focus on the continued rollout of HBO Max, now almost a year on the market.

A bunch of airlines also report this week, starting with United UAL, which is expected to hold its call tomorrow morning after releasing results this afternoon. Analysts continue to expect weak results from the industry, but the focus is more on what airline companies think will happen as the economy hopefully opens up more this summer. Also, check whether cost-cutting measures are paying off, with cash burn a major worry for the industry as daily passenger numbers remain well below normal.

In other corporate news, Tesla TSLA shares fell 2% in pre-market trading after news reports about a Tesla driverless car crashing in Texas.

Investors See Lots of Choices at Wall Street’s Buffet

Last week offered a little something for everyone, provided you felt bullish going in. Ten of the 11 S&P 500 sectors made gains, though the Energy sector laid an egg Friday.

There seems to be a bifurcation happening in stocks that actually doesn’t hurt any particular sector. Defensive stocks like Health Care, Utilities, and Real Estate are getting some new love, maybe from investors who see them as a “safer” play for yield now that 10-year yields have lost their zip (though no market investment is truly “safe,” of course). Other investors are dipping back into Tech, which has had a great April so far and also benefits from the yield rally slowdown and hopes for strong sector earnings (see more below). 

The so-called “cyclical” category isn’t having a bad time, either, with homebuilder stocks, for instance, doing well amid improving economic data (housing starts and building permits released Friday looked strong). A few of last week’s other data points, including consumer sentiment, retail sales, and jobless claims, appear to be helping consumer discretionary stocks, maybe because there’s a sense people are back out shopping, flying, and eating at restaurants. Financials continue to benefit from the steeper yield curve and from massive earnings beats reported by most big banks last week. 

Basically, it’s very easy to build a bull case right now for a lot of different stock market strategies, though of course nothing is guaranteed to last. Covid isn’t going away, obviously, and rising cases in parts of the country and Europe have some eyebrows raised. Then there’s geopolitics, with tension rising between Russia and the U.S. last week and Iran increasing uranium enrichment, according to media reports. You can’t necessarily write off these things, especially when it comes at a time of high commodity prices that are very sensitive to political developments. 

The dollar is a bit weaker this morning, but crude and gold are also lower. Weakness in the dollar lately has been another part of the strong moves in commodities.

CHART OF THE DAY: MAYBE TRY BRICKS INSTEAD. If you’re one of the little pigs building a house right now, that bright blue line showing year-to-date prices of lumber futures (LBS—blue line) might tell you why homebuilders face high costs right now. Meanwhile, other commodities like copper (/HGS—candelstick) and crude (/CL—purple line) have kind of leveled out, but remain up sharply year to date amid strong demand. Could commodity inflation be the “big bad wolf” for stock prices? Time will tell. Data Source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Tech’s Turn from Market Top to Topping the Market? Tech shares have come back almost back to early-2021 highs as earnings season gets underway. Some of the biggest names like Microsoft MSFT and Apple AAPL are coming right up before the end of the month. S&P 500 Tech sector year-over-year earnings growth is expected to outperform the S&P 500 pretty convincingly by a score of 21.1% to 14.8%, research firm CFRA said. Personal computer demand is likely to stay robust as companies rev up to a hybrid home and office workspace. Cloud service providers like Amazon AMZN, Microsoft, and Alphabet GOOGL are likely to see revenue increases as the digitization trend, despite last year’s slowdown, sees no stopping. The Asia-dependent chip industry continues to face regional and political challenges; its current shortage is likely to be with us for the remainder of the year. Demand, however, is sky-high. Unsurprisingly, chip stocks—up 17% year to date as tracked by the PHLX Semiconductor Index (SOX)—are outperforming both Tech, which is up 10.2% year to date, and the S&P 500 Index (SPX), up 11.4%. 

Reality Check on Yields: Back in the winter of 1939–1940, the term “phony war” grew popular. The first attacks of World War II were over, and most of Europe was quiet even though the major powers were technically at war. Could we be experiencing the same kind of situation now in the Treasury market? The 10-year yield enjoyed a blistering, powerful rally during Q1, at one point averaging more than a basis point a day of growth over a full month. Since topping out at a 13-month high of around 1.78% at the end of March, it’s now back to below 1.6%, and things seem awfully quiet. This pause arguably helped revive many Tech stocks over the last few weeks, with Apple, Tesla, and Microsoft among the “mega-caps” apparently enjoying a break from rising rates. Meanwhile, small-caps have lost ground since yields peaked. 

The question is, are we dealing with a “phony” break from the yield rally or something more prolonged and serious? A couple of reasons might be behind the pause, including short covering after the long bond selloff, a slight dip in the market’s long-term inflation predictions, and ideas that a spike in virus cases could slow down reopening progress. The Federal Open Market Committee (FOMC) meets again next week, so we’ll see if Powell and company can provide any new direction. It’s interesting to note that even though yields are playing defense, futures traders now price in more than a 13% chance of a rate hike by the end of this year, up from 4% a month ago. 

Is Anyone Thinking of “Splitting Up”? Last year, a couple of very high-profile stocks—Apple and Tesla—split their stocks. Shares of both spiked in the weeks approaching the splits, though both have sputtered lately. Could other companies be pondering a repeat soon? While we aren’t going to mention any specific names, it doesn’t necessarily take much research to think of a few very big, popular stocks whose shares are currently in the four-figure range and might be thinking of whether it makes sense to knock those prices down a bit so more investors can jump in. 

Why do companies split shares? Psychology, for one. As a stock price climbs, some investors, particularly smaller ones, may view the shares as too expensive and out of reach. A split, in theory, takes the price down to what may be a more attractive or accessible level, while also feeding a notion among existing shareholders that they have “more” than they did before. Also, a recent study found better performance over longer time periods for stocks that split vs. those that didn’t.

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