On a Roll: Earnings Season Off To Solid Start, With Strength From Bank Of America, J&J Boosting Market

(Tuesday market open) Earnings season accelerates from zero to 60 this week—with 60 S&P 500 companies expected to report between now and Friday.

Things are off to a roaring start. Of the names that reported during Week 1, 90% topped EPS estimates, according to Bank of America BAC data. That’s the best beat rate to start earnings season since at least 2012, the bank says.

Speaking of BAC, that company became the latest bank to report better-than-expected earnings this morning, joining last week’s crowd of market-pleasing financial institutions. One thing to keep in mind about Q1 and banks, however, is that the turmoil affecting the industry didn’t hit until mid-March, meaning more than two-thirds of the quarter was unaffected. Any related weakness in business might not show up until Q2 earnings.

In other market-moving news this morning, China’s Q1 Gross Domestic Product (GDP) growth of 4.5% year over year surpassed analysts’ estimates and suggests the country’s economic reopening had a positive impact. The growth rate was up from 2.9% in Q4 but remains below Beijing’s annual target of 5%. Strong retail sales growth charged the economy in Q1.

Between the upbeat earnings news and China’s economic rebound, Wall Street trading turned green overnight following yesterday’s late rally. The S&P 500® index (SPX) is trading at better than two-month highs and is closing in on this year’s peak levels. On the less positive side, market breadth remains unhealthy, says Schwab’s senior investment strategist Kevin Gordon. The percentage of stocks above their 50-day moving average remains decisively lower, and there is only so much heavy lifting the large-cap names can do.

Morning rush

• The 10-year Treasury note yield (TNX) slipped one basis point to 3.57%.
• The U.S. Dollar Index ($DXY) slipped to 101.70.
• The Cboe Volatility Index (VIX) futures are trading near new 2023 lows near 16.92.
• WTI Crude Oil (/CL) fell slightly to $80.56 per barrel

The 10-year Treasury note yield (TNX), a benchmark indicator of the cost of money, dipped below 3.3% as recently as April 6 but went on a tear after that. Now it’s barking at the gate of 3.6%, which some analysts believe might form a technical resistance area on the charts.

Just In                                                                        

It’s a busy morning for earnings, highlighted early by BAC and Johnson & Johnson JNJ beating analysts’ estimates and seeing their stocks rise. Goldman Sachs GS, however, suffered premarket losses after the bank missed Wall Street’s quarterly revenue estimates.

GS: Earnings per share (EPS) easily beat Wall Street’s projection, but revenue of $12.22 billion came up short of the consensus for $12.79 billion. It looks like a 26% year-over-year decline in investment banking fees might have been one reason for the overall revenue miss. This is potentially an issue for all the big banks, reflecting what GS called “a significant decline in industry-wide completed mergers and acquisitions transactions and debt underwriting.”

BAC: The earnings news this morning was a bit brighter over at BAC, where profit rose 15% to 94 cents a share versus analysts’ average estimate of 81 cents. Revenue rose 13% to $26.3 billion, versus consensus of $25.13 billion. BAC continues to benefit from strong net-interest income, which is the spread between the interest banks generate from their loans and the interest they pay to depositors. Net-interest income continues to be a tailwind for many banks, propelled by the Federal Reserve’s sharp rate increases over the last year.

JNJ: The giant medical and consumer products company posted Q1 revenue growth of 5%—better than Wall Street had expected—and EPS of $2.68 compared with consensus for $2.50. U.S. sales growth looked particularly solid at 10%, but international sales growth of just 2% might have been hurt by the strong U.S. dollar. Sales in the company’s pharmaceutical business grew 4% in Q1.

Eye on the Fed

The probability of a 25-basis-point increase next month is close to 87% this morning, according to the CME FedWatch Tool.

Stay tuned at 1 p.m. ET today for a speech by Fed Governor Michelle Bowman on the “Considerations for a Central Bank Digital Currency.” The topic is sounds interesting, though not directly related to economic and interest rate trends.

Stocks in Spotlight

Bank earnings continue tomorrow with Morgan Stanley (MS) and U.S. Bancorp (USB). Electric vehicles also pull up as Tesla (TSLA) is scheduled to report Wednesday. But first, we have Netflix (NFLX) this afternoon.

NFLX has projected $8.2 billion in quarterly revenue, up 4%. Analysts expect a rise in subscribers of 2.26 million for a total base of 233 million, Barron’s reports. NFLX itself no longer releases forecasts for subscriber growth, so one thing to look for is whether NFLX’s introduction of a lower-priced, advertising-supported subscription tier is starting to pay off.

Another afternoon report today comes courtesy of United Airlines (UAL). As Barron’s reported, UAL surprised investors last month when it forecast a loss ranging between 60 cents and $1 per share for Q1, citing higher jet fuel prices, capacity growth, and lower demand. Analysts had been expecting $0.66 for EPS. Shares dove 12% in two days, and now analysts expect UAL to post a loss of $0.73 per share. Listen for anything company executives say about summer travel trends. Competitor Delta (DAL) sounded optimistic when it reported last week.

We’ll talk more about TSLA tomorrow, but for now, keep a couple of questions in mind ahead of its earnings:

How will price cuts affect margins?Have investors gotten a ding from every TSLA price cut? Yes, Barron’s notes, but they haven’t lasted long. Instead, watch for pain points around wherever Q1 automotive gross margins land. In Q4, they were at 25.9%, the lowest in five years (but still above most competitors).

Is the economy starting to bite? Late last month, the New York Fed reported that auto loan rejection rates rose to 9.1% in February, up from 5.8% last October and at the highest level since February 2017. Various reports indicate the average Tesla buyer is under 40, male, and earns more than $100,000 a year. If rates keep rising and hiring cools even more, what will that mean for TSLA’s core customer?

What to Watch

Home brew: March Housing Starts and Building Permits data this morning were a bit of a mixed bag. Starts came in short of expectations at a seasonally adjusted 1.42 million versus the average estimate of 1.458 million. But permits exceeded analysts’ forecasts at a seasonally adjusted 1.413 million, and the prior month’s permits got an upward revision. Since permits are the more forward-looking metric of the two, the report might be read as somewhat optimistic for the home-building companies.

Meanwhile, yesterday’s April Empire State Manufacturing Survey easily exceeded analysts’ expectations and may have signaled a slight rebound in the sagging manufacturing sector. The report appeared to be one factor weighing on Treasury note values Monday, sending yields higher.

Talking Technicals: Anyone watching the charts would likely chalk up yesterday as positive for two reasons. First, major indices turned around early losses to close higher across the board. Second, the S&P 500 index (SPX) closed above 4,150 for the first time since February 7. Real estate, financials, and industrials were the leading sectors Monday.

While there’s nothing magical about 4,150, there were many days in the last two months where the SPX traded above that level intraday only to close below it, so it may be significant that selling didn’t block the way this time. Sometimes, but not always, a strong close can translate into follow-through buying the next day.

Thinking cap

Ideas to mull as you trade or invest

June at the Fed: Most analysts’ calculations now bake in a rate hike in May, so it’s a good time to look ahead to the Fed’s following meeting in June. The futures market puts its highest probability (65% as of midday Monday) of rates rising 25 basis points in May and then pausing in June, according to the CME FedWatch Tool. But not everyone’s aboard that train, and the probability of another 25-basis-point rate hike in June is on the rise at 25%. That’s up from less than 4% a week ago. Hikes of 25-basis-points in both May and June may be warranted due to stubborn inflation, research firm CFRA said last week.

Yield signs: The recent rise in Treasury yields is a bit of a head-scratcher considering the softness of so much economic data over the last two weeks, but this isn’t a normal environment. The Fed’s hawkish approach likely means more rate hikes ahead despite sluggish economic signs, so yields appear to be taking the path of least resistance higher for now. In another sense, rising Treasury yields may reflect more of a “risk-on” attitude in the stock market, perhaps suggesting that investors are gravitating toward stocks and abandoning fixed income. If that’s the case, it might reflect trends in investor sentiment, which recently dipped toward very low levels. Weak sentiment can sometimes be a canary in a coal mine for a stock rally, implying that bearish feelings may have peaked. The Citigroup (C) Market Sentiment gauge recently hit “panic” territory but is now edging up toward “neutral.”

Clear as mud: Data often send mixed signals, and when it comes to inflation it’s one of those times. Headline inflation continues to show signs of improvement, but core measures and those most watched by the Fed are proving stubborn in their path toward cooling. This could ultimately make the Fed’s job more difficult. Take a deeper dive into recent inflation data and their possible impact in this new perspective from Schwab’s chief investment strategist Liz Ann Sonders and senior investment strategist Kevin Gordon.

Calendar

April 19: Fed’s April Beige Book and expected earnings from Abbott (ABT), Tesla (TSLA), Morgan Stanley (MS), and Travelers (TRV).

April 20: March Existing Home Sales and Leading Indicators, and expected earnings from AlaskaAir (ALK), American Express (AXP), AT&T (T), Philip Morris (PM), Taiwan Semiconductor (TSM), and Union Pacific (UNP).

April 21: Expected earnings from Freeport McMoRan (FCX), and Procter & Gamble (PG).

April 24: Expected earnings from CocaCola (KO).

April 25: April Consumer Confidence, March New Home Sales, and expected earnings from 3M (MMM), Dow Chemical (DOW), General Motors (GM), Alphabet (GOOGL), Microsoft (MSFT), Halliburton (HAL), McDonald’s (MCD), PepsiCo (PEP), Raytheon (RTX) United Parcel Service (UPS), and Verizon (VZ).