Apple And Amazon Earnings, Fed Meeting Among Highlights In Busy Week Ahead

Apple Inc. AAPL and Amazon.com, Inc. AMZN earnings. Meetings of the Fed and other key central banks. Economic growth data.

This week arguably has it all, and it starts with some optimism. Stocks rose in Europe, and U.S. futures also gained amid talk of reopening economies in Italy and Spain and some U.S. states. Travel-related stocks and other sectors hit hardest by the virus enjoyed some of the better overnight performances.

Though major U.S. indices all finished lower last week, none fell by much, and the closely watched small-caps actually rose slightly. That’s a twist on things that could be seen as bullish, because small caps had been trailing large caps through most of the last two months.

It’s not all positive this morning. Crude is back below $14 a barrel as the world storage situation for oil continues to look shaky and demand remains microscopic.

Earnings Extravaganza This Week and Next

There are two weeks each quarter when earnings reach a crescendo, and this is one of them. Nearly 170 S&P 500 companies share results over the next five days, including the kahunas mentioned above. 

A few brave companies did raise or at least provide new guidance the last few weeks, but most pulled their outlooks. You can’t really blame anyone for that, since no one knows how this situation might play out or when it might die down. Q1 earnings are seen declining nearly 15% from last year, according to Refinitiv, a financial market data provider. Q2 earnings are seeing falling more than 30%. 

It’s also getting more and more evident when you listen to CEOs that they don’t expect business to be normal right away even when the economy reopens. There’s talk of only letting a certain number of people into businesses at a time, for instance, or having workers rotate who comes to the office every day. Will people accept those changes, or just decide it’s easier to stay home?

Those are questions for the long term. For now, let’s look at the earnings calendar this week and get a sense of what’s directly ahead. Today lacks earnings firepower, but things take off tomorrow morning with 3M Company MMM, Caterpillar Inc. CAT, PepsiCo, Inc. PEP, and D.R. Horton, Inc. DHI. Those four could give investors a nice look at a few multinational conglomerates, with a major homebuilder thrown in for good measure to offer a closer view of the domestic economy. 

Healthcare also gets some attention tomorrow morning as Merck & Co, Inc. MRK and Pfizer inc. PFE report (see more below). Additional earnings later this week are on tap from United Airlines Holdings, Inc. UAL, Ford Motor Company F, Boeing Co. BA, Alphabet, Inc. GOOG GOOGL, Facebook, Inc. FB, Microsoft Corporation MSFT, Baxter International Inc. BAX, Starbucks Corporation SBUX, Apple (AAPL), and Amazon (AMZN), among many others. The so-called “FAANGs” dominate the picture.

GDP, Fed Meeting Also on Calendar

Data-wise, consumer confidence on Tuesday and a first look at Q1 gross domestic product (GDP) on Wednesday stand out. The Q1 GDP might get a fisheye from many, because half of the quarter came before the economy got crushed by coronavirus. Many participants are more focused on Q2 growth, or should we say Q2 losses. 

Last Friday’s University of Michigan sentiment report was pretty down in the dumps, but not quite as bad as some analysts had expected. Consumer confidence tomorrow is probably worth a close look.

The Fed does have a meeting scheduled this week, but it’s not as front and center as it might be at other times. The futures market shows zero probability of any rate hike this entire year and even into early 2021, so no one is likely to be sweating out the conclusion Wednesday afternoon. It’s more a matter of what are Fed officials’ fears and what are their hopes as the crisis continues.

We’ll have special coverage of the meeting here after it ends, so stay tuned. The Bank of Japan and the European Central Bank also meet this week, so those are something else to keep an eye on.

Some Sparkles Last Week Despite Light Losses

The old week ended with some fireworks—the type investors like to see—as major indices powered into Friday’s close and all sectors finished in the green that day. Even the beaten-down Russell 2000 (RUT) small-cap index joined the party Friday as buyers came back after a mixed start. A little “FOMO” trade seemed to work itself in, Briefing.com said, meaning investors feared missing out a rally with the market so resilient lately. We’ll see if that resilience continues into this week.

The S&P 500 Index (SPX) closed the old week not far below its 2842 Friday high, but it hasn’t traded above 2879 since March 10 or above 3000 since March 5. It’s unclear if many investors will feel comfortable testing those levels when so much remains uncertain. The market hates uncertainty, as any seasoned investor would probably tell you.

Last week was the first red one for the SPX in the last three, but a 1% setback is pretty easy to swallow after some of the double-digit daily losses a month ago. It’s definitely feeling more stable, and volatility is easing. The Cboe Volatility Index (VIX) ended in the mid-30s Friday for the first time in more than a month. Caution remains in the air, though, as the 10-year yield can’t seem to get much traction above the very low level of 0.6% (see chart). It’s at 0.62% this morning.

As we noted here Friday, the SPX has carved a relatively narrow range between roughly 2750 and 2880, and it stayed there most of last week. The exception was the oil-related losses last Monday, but the SPX recovered pretty convincingly the last three days of the week following that hiccup. It also feels technically constructive that last week’s low stayed above the low posted the previous week. 

Energy stocks got some pep last week as crude recovered nicely from the chaos of negative prices. Today’s slide below $14 a barrel shows it’s far from out of the woods, however. Both Halliburton Company HAL and Apache Corporation APA had nice weeks, but $14 is a bad place for many companies to be. Some energy companies are doing some things to save money that they’ve been forced to do, like slowing production, but the market sees that as a good thing. At some point, there will be demand. People will fly again. People will drive again. Exxon Mobil Corporation XOM and Chevron Corporation CVX both report on Friday, giving everyone a close-up look at the oil patch.

Meanwhile, mining company Freeport-McMoRan Inc. FCX rolled up 8% gains Friday as investors appeared to cheer some of the cost-cutting measures and debt repayment it announced in its earnings report. FCX is one of the world’s biggest producers of copper, an important metal used in lots of industrial applications, so the stock might be a decent barometer to keep an eye on. Copper futures rose nearly 2% Friday, but low copper values hurt FCX’s Q1.

On the downside, BA took a 6% dive Friday as it’s starting to look like it might face a longer time getting the all-clear on its 737 Max. It’s also cutting Dreamliner production, according to the media. There’d been hopes for some news soon on the grounded Max, but media reports suggested the pandemic could be pushing any approval back toward late summer. So the ball might be getting punted again, and that won’t help BA in any way, shape, or form. The company reports earnings this week, and they’re expected to be awful, analysts say, for lack of a better word.

CHART OF THE DAY: MIXED SIGNALS: On the one hand, volatility is going down, as this three-month chart of the Cboe Volatility Index (VIX—candlestick) shows. On the other, 10-year Treasury yields (TNX—purple line) can’t seem to get any traction higher. For the moment, this relationship appears a little off, because if people are feeling less cautious about stocks (as VIX seems to indicate), you’d imagine yields might move higher. That’s not happening, but low yields probably reflect all the bond buying being done by the Fed. Chart source: Cboe Global Markets. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Could Big Health be Considering M&A? With Merck (MRK) and Pfizer (PFE) reporting tomorrow, investors get a close-up look at two of the biggest companies in what now is the best-performing sector of the year. Both Abbott Laboratories ABT and Eli Lilly and Comapny LLY got nice boosts after reporting earlier this month, so we’ll see if the trend continues. Obviously, a lot of the focus is going to be around PFE’s and MRK’s progress in trying to address the virus. MRK has done a bit better than PFE from a market perspective since this all started, something Forbes said could reflect MRK’s strong oncology portfolio.

Another thing to consider looking for as PFE and MRK report is their perspective on possible mergers and acquisitions (M&A). With stock buybacks now getting frowned on and big health firms looking to expand their pipelines, it’s possible they’ll consider using extra cash to look for add-ons, Barron’s reported last week, referencing an analyst note from RBC Capital Markets.

Fed Ahead: With no Fed rate move apparently looming this week, it could still be helpful to hear the latest economic insight from Fed Chairman Jerome Powell. One question he might get asked Wednesday in the post-meeting press conference (perhaps a virtual one?) is how the Fed would consider responding to any sign of improvement in the virus situation or if it has more plans in the works if things get worse. Is additional balance sheet expansion possible? Just FYI, the Fed will reduce its Treasury purchases to $10 billion per day this week from $15 billion per day last week.

Get Small: Amid all the hoopla about how the major indices have rebounded nearly 30% from their March lows, the small-cap Russell 2000 Index (RUT) still trades at its weakest level since late 2016 (outside of the March meltdown) and is off 26% for the year, vs. about a 12% drop for the SPX. Some say the disjointed performance reflects investors’ concerns that small companies could take a bigger hit from the crisis, or that domestic-focused companies (which are a larger share of the RUT) have a more uncertain outlook than multinationals.

Like a lot of things, however, the picture gets a little clearer when you drill deeper down. Some of this is because of the different weightings these indices have, with the RUT weighted more toward certain sectors (especially Financials) that have been devastated most by this crisis. Financials make up about 17% of the RUT’s weighting and 12% of the SPX’s. Also, nearly one-quarter of the SPX’s weighting is in the Information Technology sector, which is the second-best sector this year after Healthcare. RUT has a much smaller weighting toward tech. Old market wisdom suggests a small-cap rally can be a barometer for better times ahead, but the structural differences between SPX and RUT could make it harder these days for small-caps to get out of their own way.