Alphabet, Boeing Shares Get A Lift Following Earnings, While GE Falls Short

Today, the intensity meter goes to 11.

If the busiest earnings week of the quarter hasn’t grabbed your interest, maybe throwing in a Fed decision and key economic growth data today could get you excited. There’s also fresh positive news about a drug trial aimed at coronavirus. This is one of those days when everything seems to be happening at once. 

Stocks have a firmer tone in pre-market trading as the so-called “FAANGs” appear to be on the comeback trail following a couple days off from their rally and investors prepare to digest all kinds of earnings news and crude rose firmly. 

The latest news as the opening bell approached was an intriguing headline that Gilead Sciences, Inc. GILD reported “positive data” from its remdesivir coronavirus drug trial, but we don’t know all the details yet. 

Alphabet, Inc. GOOGL GOOG aced its earnings late yesterday, helping give the company’s shares a 7% lift in pre-market trading. GOOGL slightly beat Wall Street’s revenue estimate but missed on earnings. What stood out was advertising revenue not dropping as much as some analysts had expected, strength in stay-at-home products like YouTube during the crisis, and budget cuts.

The company surprisingly is also going to continue buying back stock, and said revenue appears to be coming back after a big slide in March. The stay-at-home economy seems to be relying more on GOOGL’s stuff as the popularity of YouTube surged.

Tesla, Microsoft, Facebook on Schedule Later

Tech comes into the picture this afternoon as Microsoft Corporation MSFT is set to report, and Tesla, Inc. TSLA drives up after the close, too. Facebook, Inc. FB also is due to post an update later today.

In preparing for FB later today, you want to hear about their ad revenue. That’s the biggest thing. The bottom line for GOOGL was advertising revenue not dropping as much as expected, so it would be good to hear a similar story from FB. 

Tomorrow brings Apple, Inc. AAPL fiscal Q2 report, along with Amazon.com, Inc. AMZN. The “FAANG” stocks rallied over the last few weeks into their big earnings showdown, but generally gave up some ground the last two days, maybe in part because they’ve been on such a nice run.

There’s also talk of a possible trend of investors starting to roll out of some Information Technology positions and into some of the more beaten-down sectors, which seemed to be the case Monday and Tuesday (see more below). Whether this is actually a trend or just a two-day break from the tech rally remains to be seen, but the pre-market trading Wednesday suggests investors might be ready to dive back into tech.

Back on the earnings beat, Boeing Co. BA posted results that were about as dismal as you might have expected. Despite that, shares rose in pre-market trading. General Electric Company GE, which has big exposure to the travel industry, also delivered a less than rosy report.

GDP sank 4.8% in Q1, the government said, worse than the Wall Street consensus for a 3.5% drop and the worst quarterly performance since Q1 of 2014 and the steepest slide since the financial crisis.

No Fed Suspense to Speak of

To paraphrase an old commercial, this is not your father’s Fed meeting. Or even your older brother’s or sister’s, for that matter.

All eyes are on the Fed announcement at 2 p.m. ET today, but it’s no secret that the Fed isn’t likely to change rates. Futures trading at the CME puts the odds at zero percent not just for this meeting but for all Fed meetings through the rest of the year. There goes any suspense. Rates are at zero and that’s where it appears they’ll stay for a long, long time. 

Also, the Fed is making most of its policy outside of its regular meetings, so you almost wonder what they have to discuss this time. Going through all the things the Fed has done over the last six weeks to help ease the pain of the pandemic would take far too much room here, but let’s just say it’s been unprecedented. 

So, is there anything to talk about when Powell comes to the podium this afternoon? Investors might expect Powell to be an expert on COVID-19, but he’s not, and it’s the path of the virus that might ultimately determine the path of the economy. People are probably going to want to know what sort of impact, if any, the Fed’s monetary policy has had so far. They’ll also likely be wondering if the Fed plans more quantitative easing, or if the Fed might expand its reach into more markets.

Powell might also be asked about the possibility of deflation and how the Fed plans to fight it, although you could say most of its plans introduced up until now have basically been about preventing deflation. So if there’s any mystery at all today, it might be in how Powell responds to some of these questions and if he says anything new. 

As Tech Yields Floor, Small-Caps Now Outpacing Large

For the second day in a row Tuesday, Information Technology took a back seat and some of the sectors that got hammered by the pandemic moved higher. If this trend continues, it might be viewed as positive, because it could hint that investors are less fearful and less inclined to fly toward the big tech companies out of caution. Airlines took wing yesterday, led by double-digit gains for American Airlines Group Inc. AAL. Financials had another good day. 

Most strikingly, the small-caps seem to be reviving. That part of the market got some help early this week from the improvement in Financial stocks, which are heavily represented in the Russell 2000 (RUT) small-cap index (see more below). The RUT—now up five sessions in a row—started gaining traction last week, as we pointed out then, and has surged the last two days to easily outperform the bigger S&P 500 Index (SPX)

 Meanwhile, so-called “safe-haven” assets like bonds and the dollar remain elevated. The benchmark 10-year yield can’t seem to climb much from around 0.6%, and the dollar index continues to hover near 100. While stocks are enjoying much of the benefit from all this fiscal and monetary stimulus, investor caution is easy to see if you look elsewhere.

Back in the Air?

Airlines appeared to get a boost Tuesday from Southwest Airlines Co. LUV earnings. The Southwest executives used their call to map out how the airlines can get through this crisis by cutting expenses and raising capital through the CARES Act, which provides emergency relief to businesses and individuals. 

The optimism from Southwest spread to the rest of the sector, which has been so beaten down it might have just been due for a move to the upside. Most of these airlines aren’t expected to go out of business, and ultimately, people will fly again. 

Surprisingly, airlines might have enjoyed an additional lift Tuesday from BA, which saw its stock recover after taking an initial hit on news that the company faces criminal and civil scrutiny into years of widespread quality-control lapses on its 737 MAX assembly line, according to The Wall Street Journal. By late in the session, BA was up more than 1% as investors awaited its earnings report Wednesday.

CHART OF THE DAY: OUT OF ITS RUT? Over the last month, the Russell 2000 Index (RUT—purple line) of small-cap stocks has outperformed the large-cap S&P 500 Index (SPX–candlestick). This is a major turn-around from the first month of the crisis, and might be a bullish signal that investors have more trust in the economy improving. Data Sources: S&P Dow Jones Indices, FTSE Russell. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Another Green Shoot: Over the last month, the RUT is actually outpacing the SPX, with the RUT up about 12% over that time frame and the SPX up 9% (see chart above). This might be significant, because although you don’t want to see the big tech companies lose too much ground, it’s a healthier market if more sectors show up to play. Small-caps traditionally are seen as a barometer for future strength or weakness in the economy, so having them surpass large-caps at this strange and perilous time stands out. Strength in the RUT also could speak to growing investor faith in the domestic economy, since these stocks tend to be less exposed to overseas business. 

By the way, in the first month or so of the crisis, from late February through late March, the RUT fell 23% vs. just 14% for the SPX. So the tables have definitely turned, and it might reflect some ideas that the large-cap SPX had started to look pricey, Briefing.com said. Mid-caps also rose Tuesday.

Getting More Disjointed? Investors welcomed news this week about some U.S. states preparing to reopen. Whatever you think of the wisdom of that, it’s not necessarily 100% positive for the market. In fact, it could potentially cause more volatility and confusion, at least early on when some states reopen and others don’t. Consider the case of a hypothetical business whose main supplier is in Illinois but has a factory in Georgia. The supplier in Illinois remains shut down even as the factory in Georgia reopens, so the Georgia factory might not be able to get the parts it needs to start the lines moving. What happens to workers there? Do they stay furloughed, or does the company cancel their furloughs and pay them to wait for Illinois to open up? In the U.S., individual states have a lot of power over their own rules, but the economy has to function across all 50 states. Lack of a unified reopening could cause things to get more disjointed, not less. 

Home Furnishings: Pending home sales data for March are due to hit the tape today at a time when homebuying applications are at their lowest level since 2015, according to the Mortgage Bankers Association. Hundreds of thousands of Americans have stopped paying their mortgages. This is really tough on furniture and appliance retailers, because fewer people moving likely means fewer buying that perfect end table or comfy couch. It also could hit home renovations, which we’ll possibly learn more about with Home Depot, Inc. HD and Lowe’s Companies, Inc. LOW reporting next month. That said, the homebuilder companies did well yesterday. 

At least one company in the furniture sector seems to be in the right place at the right time. Next week brings earnings from Wayfair Inc. W, an e-commerce company that sells furniture and home goods. That’s been a really interesting story lately as shares climbed 400% from the March low through the end of last week and another 5% on Monday before dropping on Tuesday. A bunch of analysts raised their price targets for W recently thanks in part to the idea that furniture shopping is more of an online event here in the pandemic.

TD Ameritrade® commentary for educational purposes only. Member SIPC.