Packed Earnings Week Begins, With Apple, Amazon, Facebook Among Companies Reporting

Welcome to a week that might offer something for everyone. 

The next few days include earnings from four of the five “FAANG” companies and one-third of the S&P 500 overall. There’s also a Fed meeting, and Congress could be making progress on an infrastructure bill. Get ready for possible volatility amid all this news. 

Last week featured an amazing turnaround that really helped demonstrate the resilience of this market. If someone had told you after Monday’s selloff that we’d end up being higher for the week with indices back at record levels, you might have thought they were crazy. But that’s what happened, and the market seemed to gather more strength going into Friday’s close. 

What’s driving this? It’s probably earnings, at least to some extent. And we’re about to start one of the biggest earnings weeks of the quarter featuring 180 of the companies in the S&P 500 and one-third of the Dow Jones Industrial Average ($DJI) components, so don’t touch your dial. 

Major indices rose four sessions in a row through Friday but turned lower in overnight trading heading into the new week. Pressure from losses in Asia might be a  factor. It’s also a bit worrisome to see the 10-year Treasury yield fall back below 1.25% in the early going after flirting with 1.3% on Friday. Weaker yields sometimes suggest concerns about economic growth.

Nearly 90% of Companies Beating Street’s Earnings Estimates

By Friday, 24% of the companies in the S&P 500 have reported results for Q2. Of these, 88% reported EPS above consensus estimates, FactSet said. That compares to the five-year average of 75%. 

Earnings estimates for the quarter as a whole are on their way up, too, with FactSet now estimating Q2 earnings growth of 74.2%, compared with its previous estimate of 69.4%. Positive earnings surprises reported by companies in multiple sectors (led by the Financials, Health Care, Information Technology, and Communication Services sectors) led to improvement in the overall earnings estimate over the past week, FactSet said. 

This week’s calendar is packed. Some of the major companies expected to report include Tesla TSLA, Alphabet (NASDAQ: GOOGL), Apple AAPL, Facebook FB, and Amazon AMZN. Leaving TSLA aside, that’s quite a mouthful of FAANGs. Microsoft (MSFT), sometimes thought of as an honorary FAANG, is also on the calendar. 

Financials and a lot of the Dow Jones Industrial Average ($DJI) stocks started earnings off with a good tone, but you could argue that the real heavyweight fight begins this week with the AAPLs and the MSFTs. They likely need to come through with solid results to keep this rally going. 

What’s a little unclear is how much of a role Treasury yields are playing. They initially bulked up early last week after falling sharply on Monday, but then they just couldn’t keep up the pace with stocks and ended Friday at 1.28% for the benchmark 10-year yield. The 1.3% level looks like a key one and it didn’t get seriously tested much despite the stock market rally. 

This morning’s weakness in yields might hurt Financial stocks, but big banks have done a good job of controlling expenses and generating revenue even in the current low-rate environment. 

Don’t Forget The Fed This Week

As long as we’re talking fixed income, it’s almost an afterthought that a Federal Open Market Committee (FOMC) meeting starts tomorrow and finishes Wednesday. There appears to be no expectation on Wall Street for any action from the Fed, but the market might trade a little more slowly and in a tighter range the next day or two until the Fed announcement at 2 p.m. ET Wednesday. As always, Fed Chairman Jerome Powell’s press conference soon after that is probably worth a glance. 

People want to know if the Fed is right about inflation being “transitory,” but it’s really going to be hard to tell until the end of the year. Right now, we’re still comparing prices to last year’s Covid-reduced levels, and many people remain out of the workforce. Some people are getting back to work, but many states won’t be ending enhanced unemployment benefits for a few months. This means we don’t truly have a handle on how consumer spending and wages are affecting prices.

Meanwhile, companies like McDonald’s MCD Shake Shack SHAK are paying bonuses to get workers in the door. Will wages have to continue to be higher across the board? One thing that absolutely can drive inflation is more money in people’s pockets. 

The really difficult thing for the Fed about inflation is that it starts slowly and then can speed up so that it’s hard to stay ahead of it. The answer about transitory vs. lasting is probably something we won’t know until late 2021, which could mean the type of volatility we saw last week is something you may have to get used to in the back half of the year. 

Let’s Talk IPOs, Leisure Travel, And Key Data, Including GDP

One thing that does seem certain at this point is the initial public offering (IPOs) scene keeps getting busier. There were 20 IPOs last week and 18 expected this week. Typically it’s a good sign for the economy if lots of companies are going public because it can mean lots of money is out there chasing opportunities, and that these young firms are seeing interest from investors.  When the economy goes south, more people tend to put their wallets back in their pockets, stifling the IPO market. 

Other signs of economic strength recently could be the positive spin from major airlines in their earnings calls last week and a solid earnings report from American Express AXP. That’s a company that often ties into the airline sector with its focus on business travel.

As if all the earnings and the Fed meeting weren’t enough this week, there’s a full helping of economic data, too. One of the top things to look out for is personal consumption expenditure (PCE) prices for June, due Friday, a report that the Fed has said it watches closely as an inflation indicator. 

New home sales for June are due later this morning, and Thursday morning brings the government’s first estimate of Q2 gross domestic product growth. We’ll talk tomorrow and Wednesday about what analysts expect these reports to show and how that could affect the market.

CHART OF THE DAY: IS GOLD WAITING FOR GODOT? From a technical perspective gold futures (/GC—candlestick) seem to be bouncing off the 1794 level, which looks like a short-term support level. But it’s not clear which direction gold is likely to move. The U.S. Dollar Index ($DXY—purple line) continues to move higher but /GC is acting indecisive. Will it depend on interest rates? Time will tell. Data source: CME Group, ICE Data Services.  Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Gold’s Trying to Figure Things Out: Market relationships among asset classes sometimes need to take a break. We’re seeing a little bit of that play out with the relationship between gold and the U.S. dollar. Usually, you’d expect gold to rally when Treasury yields are low. But this time it’s also battling a strengthening dollar (see chart above). Gold futures (/GC) were trending higher since the end of March after what looked like a double bottom. It moved from a low of around $1,678 and hit $1,915 an ounce on June 1, before it started to reverse. That up move coincided with the fall in the 10-year Treasury Index (TNX) but here’s where things changed. The upward trend in /GC reversed even as TNX continued moving lower.

There could be many reasons for this but the one that’s likely to explain this move is the strengthening U.S. dollar. The U.S. Dollar Index ($DXY) has been trending higher since the end of May rising from 89.50 to where it’s trading now—just below the 93 level.

And gold is kind of caught in between. It doesn’t really know whether to move in relation to TNX or $DXY. We may get a better idea of which one is likely to play a stronger role in gold’s move after the Fed meets this week. 

Travel Bifurcation: Leisure travel demand is looking phenomenal this summer, but business travel could take longer to rebound, especially with some companies still delaying their “back to work” deadlines. Those are some of the things investors learned from major airlines that reported last week. Any delay in companies getting people back into the office could mean a slower comeback for business travel, and it may not be until kids are back in school and childcare concerns start to be less of an issue that businesses start sending people up in the air again. Airlines tend to love business travelers because they’re consistent and come back time after time, not once a year. 

Snaps, Tweets, Likes, And Clicks: The social media segment took a giant leap forward last week after Snap SNAP and Twitter TWTR reported blockbuster earnings, revenue growth, and, perhaps more importantly, user growth. Not only did shares of these two social platforms advance—about 24% for SNAP and 3% for TWTR—but we also saw sizable sympathy rallies in Facebook FB and Alphabet GOOGL, both of which report next week. Why such a strong reaction to this continued strength in ad revenue? After all—ad dollars have been trending away from traditional media toward online platforms for years. 

It could be, at least in part, a sign (and sigh) of relief as the economy moves past last year’s COVID-19 lockdowns. For a good chunk of last year, online media was the only game in town, which was a net boon to these social platforms, as well as to streaming giants like Netflix NFLX and Disney+ DIS. Remember: NFLX accompanied each quarterly release last year with a cautionary warning about pulled-forward demand and “unsustainable” growth. With the social media platforms, however, results from SNAP and TWTR may be showing last year’s user growth—and thus ad revenue growth—could have some staying power.