Economic Growth Hits Best Level Since 2014 As Earnings Season Keeps Rolling

Another full cargo of earnings unloads on Wall Street today, rounding out the busiest reporting week of the quarter in which more than 170 S&P 500 companies opened their books. 

Additionally, the wrapping paper came off one of the quarter’s key data points this morning—Q2 gross domestic product (GDP)—which turned out as Wall Street analysts had expected at 4.1 percent.

Before GDP, another tech company came in with results that didn’t seem to light up the boards, as Twitter Inc. TWTR beat Wall Street analysts’ earnings and revenue estimates but came up well short on monthly active users. Shares fell 16 percent in pre-market trading before the bell. TWTR said its monthly active users totaled 335 million, compared with analysts’ projections for 338.5 million. Guidance also came in below average Street expectations. TWTR continued a potentially troubling trend so far this earnings season in which some of the most closely-watched tech firms, including Facebook, Inc. FB and Netflix, Inc. NFLX, have disappointed many investors with their user numbers.

Another disappointing earnings report came from oil major Exxon Mobil Corporation XOM, which missed Wall Street’s expectations on earnings per share, though it beat on revenue. Shares fell 4 percent in pre-market trading.

Meanwhile, shares of Intel Corporation INTC were down 6 percent amid questions about the release timing of the company’s 10 nanometer technology. That said, the company beat Wall Street analysts’ earnings and revenue expectations. 

In addition, a celebratory burrito may be in order today as Chipotle Mexican Grill, Inc. CMG had a strong quarter. Expedia Group Inc. EXPE also came in well above expectations. Shares of both companies took off in pre-market trading.

Markets seemed primed for a relatively flat open as the healthy GDP number seemed already baked into the cake in some respects. It was the best quarterly read on GDP in nearly four years, and came after many other recent data points also hinted at strong economic performance. It also might help erase memories of the economy’s sluggish 2 percent growth in Q1.

Amazon’s Bulging Profit Helps Bring “FAANGS” Some Cheer

The dark clouds that hit the “FAANGs” late Wednesday after Facebook's disappointing results seemed to lift a bit late Thursday when Amazon.com, Inc. AMZN hit it big with Q2 earnings. AMZN appeared to land most of its shots in regulation, surpassing Wall Street analysts’ estimates for profit in its retail business and growth in its cloud business. Cloud revenue jumped 49 percent year-over-year to $6.1 billion, above analysts’ $6 billion estimate. That follows a strong quarter for Microsoft Corporation MSFT cloud business. 

While AMZN’s retail revenue came in a bit lighter than analysts had expected, the company’s North American retail business reported an operating profit of $1.84 billion, more than four times the $436 million recorded in the same quarter a year ago and well above the $1.04 billion expected by analysts. Net income for Q2 hit $2.5 billion, marking the first time the company has ever surpassed $2 billion in quarterly profits. Earnings per share of $5.07 blew away Wall Street analysts’ average estimate of $2.49.

The question is whether AMZN’s results could be enough to help reverse fortunes for the sagging tech sector as Friday dawns. The tech-heavy Nasdaq (COMP) got whacked Thursday, falling 1 percent as investors absorbed the FB news. FB shares had their worst day ever, sliding 19 percent and losing $120 billion in market cap. FB’s revenue, user growth, and guidance all came up short, causing some investors to question whether the company is bouncing back from the user privacy issues that started to burden the social media firm earlier this year.

As we noted yesterday, however, FB isn’t the entire tech sector. The mostly strong AMZN results reinforce that even though the so-called “FAANGs” do get grouped together, they play in different businesses and have different challenges. Of the FAANGS, only FB really took a beating Thursday. Shares of AMZN got a nearly 4 percent lift in pre-market trading.

Doing the Sector Shuffle

The leading sectors Thursday were utilities, energy, and industrials. There’s no way to really put any kind of “trend” spin on that one, since those sectors represent both cyclicals and “defensive” areas. It’s possible utilities got a boost from some concerns surrounding the bigger than 1.6 percent drop in the info tech sector, but it doesn’t appear too likely that people leaving info tech simply moved their funds into utilities, a sector with a reputation for being the polar opposite of tech when it comes to market excitement.

Industrials got a boost in part from airlines, which had a strong day after better than expected earnings results from Southwest Airlines Co. LUV and Alaska Air Group, Inc. ALK. Other industrials like Caterpillar inc. CAT, Boeing Co. BA, and 3M Co. MMM also did well, perhaps in part due to easing trade concerns.

Sectors were all over the place Thursday and so were indices. The Dow Jones Industrial Average ($DJI) climbed 0.4 percent and the Russell 2000 (RUT) small-cap index rose 0.6 percent. The NASDAQ fell 1 percent, but the overall market didn’t suffer dramatic losses. The SPX enters Friday up about 1.3 percent so far this week, while the COMP is still up a smidgen for the week despite Thursday’s downturn. Ten-year yields really have zoomed up, reaching a two-month high of 2.98 percent Thursday, up from recent lows near 2.8 percent. It fell slightly to 2.96 percent early Friday. The dollar and oil also strengthened Thursday, both potential signs of economic healthiness. However, rising yields didn’t lend much help to financials yesterday, as that sector dipped slightly.

FIGURE 1:  Holding Their Own: The info tech sector (candlestick) remains solidly higher over the last month despite Thursday’s Facebook-led sell-off. Meanwhile, utilities (purple line), sometimes considered a “defensive” sector, continue to post monthly gains, perhaps a sign that some investors remain cautious. Data Source: S&P Dow Jones Indices. Chart Source: The thinkorswim platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Another Potential Sign of Corporate Health

The net profit margin so far for S&P 500 companies reporting this quarter through earlier this week was 11.6 percent, FactSet noted. That ties with the Q1 for the highest on record since FactSet began tracking this data in 2008. Some of the factors possibly contributing to these high margins include lack of a big gain in labor costs, a weak dollar through much of the first half, and low interest rates. Naturally, all of these factors could be among those pressing corporate profits in quarters to come. Rates keep rising, salaries have begun climbing more quickly, and the dollar has strengthened. So there’s some question whether companies can continue enjoying these kinds of margins.

Cool Beans

One possible beneficiary of what appear to be improving trade relations between the U.S. and Europe after Wednesday’s high-level talks could be the humble soybean. While it might not be the most romantic product in the market, ideas that U.S. soybean exports might get a boost initially gave Chicago Board of Trade soybean futures a lift early Thursday to above $8.90 a bushel. However, the contract couldn’t hold its gains and slipped below $8.75 by the end of the day. Still, soybeans are up significantly from recent levels below $8.30, a multi-year low that came amid trade worries.

Soybeans—used for animal feed, various foodstuffs, and industrial applications—are a huge export crop for the U.S., but constitute a major item on China’s hit list as tariff battles rage between the two countries. Last year, China bought about 33 million tons of U.S. soybeans. While some U.S. farmers might welcome new purchases from Europe, it’s probably a drop in the bucket compared with how much they might be losing in China sales, analysts told Bloomberg. 

Earnings Extravaganza To Continue

ooking briefly ahead to next week, the earnings fun just keeps rolling along. There’s also the little matter of a Fed meeting, though the futures market points to odds of less than 3 percent of any rate move. Companies reporting next week include Apple inc. AAPL, Tesla inc. TSLA, and MGM Resortts International MGM, among many others. Consider getting some rest this weekend ahead of all that.

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