Step Aside, China: Earnings Dominate, With Target Impressing But Lowe's, Nordstrom Not

How’s this for a change of pace: China isn’t necessarily the lead story today.

Instead, corporate news takes over the front pages, with solid earnings from Target Corporation TGT above the fold. Shares of the retailer jumped more than 8% in pre-market trading after TGT delivered a really clean quarter, surpassing the Street’s estimates on earnings per share and same-store sales growth.

However, not all the tidings were good from major retailers. In fact, the fresh batch of earnings reports this week raises some concerns. It’s one thing to miss estimates on sales in a given quarter, as many retailers did. That’s understandable, because it might be weather-related.

But when you see companies miss on sales and then guide lower, it’s a different animal altogether. Lowe’s Companies, Inc. LOW, Nordstrom, Inc. JWN, and Kohl’s Corporation KSS were among the big retailers to cut their outlooks this time around, and lower guidance is something that raises concerns. 

Nordstrom saw shares slump more than 9% ahead of the opening bell after results that disappointed on nearly every front. Earnings and same-store sales missed third-party consensus views, while the company also chopped guidance. 

Lowe’s, which also reported early Wednesday, seemed to disappoint, too. Shares dropped more than 7% in pre-market trading after the company missed consensus on earnings per share. However, there were some bright spots, with same-store sales outpacing analysts’ estimates.

The department store sector hasn’t looked too impressive this week, with J.C. Penney Company Inc JCP and Kohl’s both getting hammered. The China tension seems to be playing a role, at least with KSS, which said it imports a little more than 20% of its goods from the Asian country. This could be the first time we’re seeing tariffs affect a company’s guidance.

What does all this tell us? Well, it’s dangerous to draw too many conclusions from one earnings season, but it does appear that some of the major department stores continue to struggle, while “big box” retailers like TGT and Walmart Inc WMT had strong quarters. Both TGT and WMT posted strong digital sales growth, and  grocery sales at WMT impressed. All the brick-and-mortars are adjusting to massive changes in the industry, and some appear to be holding their own better than others. For JCP, the challenges continue, with the stock dipping close to the $1 a share level.

WMT and TGT are both doing impressive jobs in the grocery business and in digital sales. These two retailers, in particular, seem to be finding the right balance between online and brick-and-mortar.

Another angle on the recent retail earnings picture is housing. Both LOW and Home Depot Inc HD disappointed, and existing home sales for April released yesterday missed analysts’ expectations. A slumping housing market might be hurting those two home supply companies.

Despite all the focus on retail this morning, China trade isn’t completely out of the picture. In fact, new developments might be weighing on the market in the early going after The New York Times reported that the Trump administration might be planning to limit Chinese video surveillance giant Hikvision’s ability to buy American technology. This would be another step up in the simmering trade war. The paper says the administration might have several other Chinese technology firms in its sights, as well.

We’re still in a headline-driven market, but volatility has sunk a bit this week. The Cboe’s volatility indicator, VIX, is down below 16 from highs of around 20 back when the trade war re-flared earlier this month.

Open Skies

That black cloud hanging over stocks to start the week cleared up a bit on Tuesday with a 90-day extension for companies to work with Huawei, but it’s way too early to get sanguine. This trade dispute looks like it might take much longer to resolve than many people thought, and China’s government appears to be preparing for a long standoff, according to media reports.

Still, things are holding up relatively well, considering all the turmoil since May began. The S&P 500 Index (SPX) is down less than 3% from all-time highs posted late last month before the trade picture got rocky, so some analysts are now saying the 5% drop seen from the all-time high to this month’s intraday low of 2801 might have been a “correction,” not the start of anything more dire. That remains to be seen.

One question as Wednesday begins is whether the SPX can follow up yesterday’s surge higher with a test of the 50-day moving average, which sits right around the 2872 level. That’s just a few points above Tuesday’s close, and represents an area the SPX has been pivoting around for much of the last few weeks. A close solidly above the 50-day might look encouraging to people who follow technical aspects of the market.

Boomerang Sector Moves

Some of the sectors that got slammed on Monday revived Tuesday, especially Info Tech. It was one of five sectors to rise 1% or more during the session, with Materials leading the way. That sector, Materials, arguably could be one to watch closely in the weeks ahead, because it includes many of the agricultural companies that are among the most closely associated with overseas trade. Still, some economists wonder if U.S. agriculture can recover parts of the China market even if a deal gets made, because once countries switch to different agricultural suppliers, it’s sometimes hard to get them to switch back.

Info Tech is the other sector under special trade scrutiny, with semiconductor stocks, Apple Inc AAPL and Alphabet Inc GOOG likely to remain canaries in the coal mine. The Philadelphia Semiconductor Index (SOX) jumped a solid 2% on Tuesday as investors reconsidered how companies might be affected by the 90-day Huawei extension, but that still wasn’t enough to make up all of the 4% loss on Monday. The SOX is down 14% from its monthly high posted back on April 24 when things looked relatively clear-sailing on the China trade front.

Compared to then, the waves look turbulent. That was clear Tuesday when semiconductor firm Qorvo Inc QRVO lowered its guidance and said it now assumes no Q2 sales to Huawei. While shares of QRVO climbed a little on Tuesday despite the guidance cut, it does help outline that despite the Trump administration giving companies a bit of breathing room with the 90-day extension, not all is well in semi-land. Whether we start to see other companies come out with guidance cuts is something still hanging over the sector.

Split-Level Data On Housing Market

Another sector that’s been closely watched this year is housing, and there was no relief from weak data on Tuesday as existing home sales for April came in below Wall Street’s expectations. Sales fell from March despite lower mortgage rates.

In brighter news for housing, luxury home builder Toll Brothers Inc TOL beat third-party consensus on earnings and revenue in its latest quarter. Home sales revenues rose 7% from the same quarter a year earlier, TOL said in a press release, and the company said it saw improved demand as the quarter progressed. However, TOL did say the spring selling season “bloomed late.” 

Though the company didn’t cite weather, the cold, rainy spring around much of the country could be keeping some buyers away from open houses. Maybe that demand will grow as temperatures start to rise. As TOL said in its press release, low unemployment, strong consumer sentiment, and continued wage growth all seem like they could end up being positive tidings for the housing market. 

The retail rollout isn’t over for the week, with Ross Stores, Inc. ROST, Best Buy Co Inc BBY, and Foot Locker, Inc. FL all yet to come. These could be interesting calls not only for what CEOs have to say about trade issues, but also their insight into U.S. consumer sentiment. Confidence seems strong, but are consumers going out shopping? These and other earnings reports might give some clarity.
 
Figure 1: FLIRTING WITH 50: The S&P 500 Index (candlestick) has been pivoting around its 50-day moving average (blue line) for the last couple of weeks after staying above it for months. It opens Wednesday just a few points under the current 50-day moving average, and a close higher than that might be a sign of technical strength. 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.  

Rethinking Q2 Earnings?: Analysts might have to re-examine forecasts for Q2 earnings growth if this trade standoff with China lasts much longer. Already, the Info Tech sector seems to be building lower forecasts into stock prices, with one example possibly being the big drop in semiconductor stocks Monday. S&P 500 stocks saw earnings grow 1.9% in Q1 to outpace early Wall Street estimates, but now some analysts expect earnings to lose ground in Q2. For example, S&P Global Market Intelligence now forecasts a 0.9% slide in year-over-year Q2 earnings. That’s down from its estimate a month ago for slight Q2 earnings growth. 

We’ll have to keep an eye out in the next few weeks ahead of earnings to see if that firm and others lower their estimates further as tech companies navigate the fall-out not only from higher tariffs, but also from the confusion around Huawei. 

Optimistic Scenario: In this current volatile environment where the latest negative headline tends to push the market lower and everyone’s on pins and needles, it’s sometimes hard to stay positive. And of course, remaining cheerily optimistic without understanding all the possible pitfalls isn’t a good idea. Investors need to understand the risks posed to their individual holdings from a possible negative outcome on the China trade negotiations. Stocks are being re-priced, there’s no doubt, but earnings calls in Q2 could tell the real story. Earnings drive the market, and it’s also important to consider listening to what CEOs say on their earnings calls about how they see the future shaping up in light of this trade conflict. 

If you like to think positive, one thing to maybe keep in mind is that the two parties were getting closer to an agreement up until a few weeks ago. Then economic numbers improved in both countries, and that seemed to embolden the U.S. and Chinese sides. Now, with all this turmoil, it’s possible the economic numbers could depreciate a little, and that tends to bring people back to the table.

FAANGS Losing Their Bite: A year or two ago, the so-called “FAANG” stocks often seemed to trade as a single entity, with their ups and downs often helping steer the rest of the market. That’s really not the case now, and FAANGs have lost a lot of the headline excitement they used to generate. They also don’t necessarily provide much in terms of direction for other stocks, either. For instance, over the last month one FAANG stock is higher, one is flat, and three are lower. The S&P 500 Index (SPX) over that same period is down about 1%. What you see here is the FAANGs moving in different directions and not providing much influence. One reason might be falling revenue at Apple as iPhone sales drop, along with trade worries that are hurting shares of AAPL and Google parent company Alphabet. Shares of Netflix, Inc. NFLX, meanwhile, have suffered from the company’s light guidance and fear of growing competition for its streaming services. The only FAANG up over the last month is Facebook Inc FB, maybe a little surprising considering all the negative press that company has shouldered recently.

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