Morgan Stanley Impresses With Earnings, Buttressed By Robust Investment Banking

Inaugurations are about fresh starts and optimism. When you combine it with the kind of solid earnings that investors saw last night and this morning from Netflix Inc NFLX and Morgan Stanley MS, you can see why the market is having a little rally to start the day. 

Events in Washington will probably supersede whatever happens on Wall Street today, but that doesn’t mean nothing’s going on in the financial world. 

First of all, MS, the final big bank to report, impressed with its Q4 results and saw shares tick higher in pre-market trading;. The company beat Wall Street estimates on earnings per share and revenue, with an amazing quarter for its investment banking. Revenue in that segment rose 46% year over year, not completely unexpected when you consider the healthy mergers and acquisitions (M&A)  and initial public offerings (IPO) environment over the last few months. 

So, all the big banks are done, and the quarter overall not unbelievable, but good. Some disappointments came from the consumer side and hurt banks like Wells Fargo & Co WFC and Bank of America Corp BAC that do a lot of their business there. Investment banking and trading results looked very nice, for the most part. 

Besides banks, two other major earnings reports come out this morning as investors look over results from Procter & Gamble Co PG and UnitedHealth Group Inc UNH. Tomorrow is a busy day on the rails featuring results from Union Pacific Corporation UNP and CSX Corporation CSX.

Also tomorrow be ready for weekly initial unemployment claims, which surprised in a bad way last week at 965,000, the worst since August. Estimates on Wall Street ahead of tomorrow’s report are for a lower number that’s still too high: 845,000, according to research firm Briefing.com. Even that would be more than three times what we were used to before COVID-19.

Netflix Turns Things Around In Q4 with Impressive Subscriber-Adds

There’s hope that more Americans can get vaccinated soon, though the process has run into logistical hurdles. Faster vaccinations would likely put a charge into the “reopening economy” and stocks like airlines and hotels that benefit when people go out. 

Right now, though, it seems like many people remain at home watching Netflix Inc NFLX, judging from NFLX’s firm earnings and subscriber beats after the close yesterday. Shares gained more than 10% after the bell Tuesday. 

After adding only 2.2 million subscribers in Q3 and disappointing investors, NFLX went big in Q4 and added 8.5 million, way above the 6.4 million analysts had expected. Maybe more important, the company said it’s “very close” to being cash-flow positive. The ability to self-finance growth is a challenge faced by many of today’s so-called “disruptors” who, at some point, must rely less on narrative and more on profitability. If NFLX is approaching this point, that says good things about its future as more than a “disruptor” in a very competitive space. 

Turning to bank earnings—since we’re almost done with the bulk of them—Bank of America Corp BAC stock took some static yesterday immediately after releasing its results in part because of a small miss on the revenue line. But there were things to like and the stock didn’t end up falling too hard. Specifically, loans rose 8% in the quarter. Also, the bank said it released $828 million in reserves it had set aside on loans in case of possible default during the economic downturn. 

If you had just one thing to look at every quarter to get a finger on the economy’s pulse, bank loans might be a good one. If banks feel comfortable extending credit and giving loans to businesses, that’s a sign of expectations for a robust economy ahead. So why are bank stocks dragging? It could be pretty simple, actually. Look how far they’d rallied going into earnings. Maybe most of the good news was already priced in. That’s one theory, at any rate. 

Elsewhere in the corporate world, an analyst put the first $1,000 price target on Tesla Inc TSLA, but other car companies are also rolling right along as investors note that the General Motors Company GM of the world are also pretty good at building cars and are getting more involved in the electric vehicle space. 

Earnings Results, Estimates Slowly Improve

On a wider note, by the end of last week, investors had seen Q4 results from 26 S&P 500 members, or 5.2% of the index’s total membership, according to Zacks Investment Research. Total earnings for these 26 companies were up 7.6% from the same period last year on 1.9% lower revenues, with 96.2% beating EPS estimates and 73.1% beating revenue estimates. 

In addition, 56 S&P 500 companies have issued positive EPS guidance for Q4, which is above the 5-year average of 34, research firm FactSet reported. 

None of this guarantees a good earnings season, and in fact, many analysts expect overall earnings to fall year-over-year in Q4. Still, this flow of positive earnings news, along with results from the big banks that don’t blow you away but still show signs of new life, could help prolong the rally. 

One school of thought (and it’s not a new one), is that some investors see stocks as the best place in town—at least for now and even with valuations that make some longtime market watchers nervous. The bulls may have a point in saying nothing has really performed like stocks over the last seven or eight weeks as the major indices rode out a new wave of COVID-19, the violence at the Capitol, and rising Treasury yields. The 10-year yield has retreated to a level near 1.1% after rising to nearly 1.2% last week, however. 

The market seems to be looking past all the problems, including the ones around vaccine logistics. Maybe the thought is that could be a blip, but no one’s ever accused stock market traders of worrying too little. At least not until this last year or so.

The optimism  continued early this week. General Motors Company GM stayed on a roll with big gains on Tuesday as Microsoft Corporation MSFT announced an investment in GM’s autonomous tech division, and CarMax, Inc KMX had a big day after an upgrade.  Some people might be looking at the historically high valuation of Tesla Inc TSLA and seeing companies like GM and Ford Motor Company F as possible places to diversify their exposure to the future of automotive technology as those companies make progress. 

Boeing Co BA and most of the FAANGs also started out strong this week, with BA potentially capturing some interest from investors hoping that vaccine and stimulus could have more people flying soon, perhaps raising future demand for airliners. The fact is, just about everything went up yesterday, and it’s hard to say it was “stay at home” or “going out” in the lead. Hearing Treasury secretary nominee Janet Yellen telling Congress that the new administration wants to “go big” on stimulus appeared to put most sectors in a good mood.

CHART OF THE DAY: RUT VS. $DJI—NO CONTEST: If comparing the small-cap Russell 2000 (RUT—purple line) to the large-cap Dow Jones Industrial Average ($DJI—candlestick) seems like a David vs. Goliath battle, well, David just won again. This chart comparing them since November shows how the recently approved stimulus and hope for a new one have helped small-caps, which tend to do best in a strong domestic economy. 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.  

Nostalgia Rules with Yellen at Podium:  It was like old times yesterday as President-elect Biden’s choice for Treasury secretary, Janet Yellen, addressed the Senate. Well, not completely like old times, considering Yellen spoke to Congress over a video feed, but aside from that, it was a reminder of those pre-2018 days when Yellen led the Fed and frequently addressed senators. This time she might have raised both positive and negative associations for investors. 

On the positive side, Yellen said she thinks U.S. companies should be competitive on a global basis on taxes. Some might read into that a message that the new administration isn’t in a hurry to raise corporate taxes, which were lowered by the Trump administration and a Republican Congress in 2017. Yellen added that the new administration doesn’t feel like now is the time to reconsider other tax cuts from that legislation, due to the economy’s struggles. 

Less positive, from a stock market standpoint, might have been Yellen’s commitment to raising the minimum wage and addressing global warming. Whatever you think of those ideas from a political standpoint, some economists have argued both could mean more regulatory pressure on companies and perhaps (according to one school of thought) could hurt small businesses by raising their costs. That’s a debate that will probably play out in Congress soon if Biden and Yellen make an effort on the wage front. 

Daily Riddle: If you want a macroeconomic conundrum, how about this: Even as retail sales and employment looked ugly in December, the underlying “plumbing” of the economy showed new life. Friday’s industrial production and capacity utilization numbers both came in above analysts’ expectations, with industrial production especially strong. This comes after construction spending also bounced nicely in December and the ISM manufacturing index for December hit nearly two-year highs.

Why is this a conundrum? Because consumer spending is so key to all those underlying elements. If people are losing jobs and shopping less at stores and online (as the retail sales report showed), it’s hard to understand why the manufacturing sector would be ramping up. Maybe it’s the so-called “K-shaped” recovery in which one segment of the population continues to do well despite COVID-19 but many others are in worse shape than ever. Or maybe manufacturers, home builders and others dependent on consumer spending are betting on a strong recovery once vaccines help push back the virus. Or they could be betting on more government stimulus. One question that can’t be answered yet: Was the manufacturing sector too optimistic about how quickly the economy would come back? And will it be dragged by heavy inventories in coming months if it bet wrong? Riddles for the future. 

Better Credit, Better Economy: Another “finger on the pulse” metric for the economy that you can find by checking bank earnings is credit quality. When asset quality increases it helps asset backed-liabilities like bank loans. If you’re a bank sitting on loans backed by worthless assets, that’s obviously not good. But if they’re assets that can improve in coming months, that’s better. Default rates are moving down and recovery rates are moving higher. That bodes well for the Financial sector and says good things about the economy as a whole, pointing to an increased availability of capital. Bank of America Corp BAC extended $2.4 billion in credit to small business clients, up 11%, in Q4.

Additionally, the three major banks that reported last week released more than $5 billion combined in loan loss reserves they had set aside in the first three quarters of the year to cover loans going bad as a result of the pandemic, Zacks noted. That’s another potential sign of an improving economy, because the banks don’t see the need to run for cover like they did last year.

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

Photo by René DeAnda on Unsplash