Big Three: GE, Caterpillar And McDonald's Earnings Set Tone

Today’s trade likely will be dictated by three stocks reporting earnings this morning: General Electric Company GE, Caterpillar Inc. CAT and McDonald’s Corporation MCD. So far, it’s a mixed picture from these behemoths, and the market looks a little wobbly to start.

Earnings from these three are important in part because they provide a read on what's going on in terms of the rest of the world outside the United States due to their large overseas operations, and help show what effect the dollar is having on sales. They come after disappointing earnings from Alphabet Inc Class C GOOG and Microsoft Corporation MSFT late Thursday.

Here’s the score: McDonald’s announced an earnings beat, with the company’s president saying its turnaround “is taking hold,” and the stock rose 2%. Earnings came in at $1.23, vs. the $1.16 expected. Sales also beat consensus. The results from McDonald’s indicate that consumers seem to be doing well.

General Electric was a less overly positive story, with earnings per share beating expectations by two cents, but organic revenue falling slightly. Shares were lower, and there’s some question whether the company can meet year-end targets.

Caterpillar missed both earnings and revenue expectations, saying in its press release that the company had suffered “substantial reductions” in in its construction, oil and gas, mining and rail businesses. Shares fell. Because Caterpillar does a lot of business in China, investors can use Caterpillar’s earnings to get a more rounded picture of China’s economy. Caterpillar’s earnings don’t bode well for things overseas.

On Thursday, the S&P 500 Index (SPX) closed under 2,100, a bit of a psychological blow. Technical support did hold at 2,080, however. One interesting development is that investors have been selling bonds at the same time as stocks, which could indicate a strategy of taking off some risk ahead of the Fed meeting. The Fed meets April 26-27, next Tuesday and Wednesday, but no rate policy changes are expected.

In a major development for the currency market, the yen fell to 110 per dollar early Friday after media reports that the Bank of Japan might be considering new stimulus. The yen’s fall is a big deal, because it’s been stronger against the dollar recently, and that’s something that continues to bear watching.

Draghi Avoids Controversy: Yesterday’s press conference by European Central Bank (ECB) President Mario Draghi was less dramatic than other recent ones, namely because he didn’t make any remarks that could be interpreted as signaling future rate moves. While Draghi did say the ECB is ready to boost its stimulus efforts if needed due to deterioration in inflation, and that the ECB would use “all instruments within its mandate,” most of that sounded like boilerplate. Draghi said rates would remain “at present or lower levels” for an extended period of time. Another takeaway: No so-called “helicopter money” is in the offing, another stimulus measure some had been predicting. The ECB’s corporate bond purchases will begin in June, the ECB said. Issuers must be corporations established in the euro area. After Draghi’s remarks, the euro briefly hit a 9-day high, and is up about 4% vs. the dollar year to date.

VIX Snaps Back as Market Falls: The market’s most widely-watched fear indicator, the CBOE Volatility Index (VIX), which on Wednesday hit a new low for 2016 at 12.5, snapped back quickly Thursday as the stock market fell, climbing 5% by midday and recently trading back above 13. The low VIX readings had raised some concern about possible investor complacency, especially considering that the Shiller PE Ratio (which measures price to earnings for the S&P 500 based on average inflation-adjusted earnings from the previous 10 years), is at around 26. That compares to the mean of just below 17, and approaches levels last seen when the index made its all-time highs last spring. Still, the ratio is nowhere near all-time highs above 44 seen during the height of the Internet market bubble in late 1999.

No Teeth to “FANG” Earnings So Far: Alphabet missed expectations with its bottom line numbers after the market closed Thursday, coming in with earnings of $7.50 per share compared with consensus for $7.97. Revenue and profit rose sharply, but they failed to meet the market’s consensus. Alphabet is the second of the so-called “FANG” stocks to report, with Amazon and Facebook still ahead next week. Amazon gets grouped with the tech stocks, but it’s really more a retail name. Alphabet said it’s “thoughtfully pursuing big bets and building exciting new technologies, in Google and our Other Bets, that position us well for long term growth.” But investors seemed more concerned about the short-term earnings miss, and sent shares down sharply after the close. The first FANG, Netflix (NFLX), also disappointed investors and saw shares fall earlier this week after forecasting less than expected international subscriber gains. So two FANGs are in the books, Alphabet and Netflix, and both were less than sharp. That means investors may watch Amazon and Facebook even more closely next week.