The markets may experience some hangover from Amazon’s disappointing earnings yesterday but could see some recovery as other major companies such as Visa, Intel, and Verizon showed more encouraging results.
Amazon’s disappointing outlook has stock down more than 6% in pre-market trading
Solid earnings from Visa, Intel, and Verizon all counter AMZN’s weak showing
Awaiting October sentiment data, developments on China, Brexit
(Friday Market Open) If you just ignore Amazon’s disappointing results, things seem pretty good this morning on the earnings front. That said, AMZN is the bear in the room today that really can’t be ignored, with shares down 6.5% in pre-market trading based in part on its weaker than expected outlook.
More on Amazon (AMZN) below, but the morning wouldn’t be complete if you didn’t also consider that several other major companies reporting late yesterday and early today all looked solid. These included Visa (V), Intel (INTC), and Verizon (VZ), so we’re talking across several sectors.
Stocks had a flat to slightly green tint in pre-market trading Friday, helped by those strong earnings even as investors continued to digest yesterday’s unpleasant news from AMZN. It could be another one of those days where things inch along, because it looks like there aren’t enough catalysts for the market to mount a major test of all-time highs even though it’s less than 1% away. The 3000 level in the S&P 500 Index (SPX) continues to be a place where the market seems to kind of wither.
Europe and Asia were mixed overnight, not giving much direction for the U.S. open. Some worries arose yesterday on trade when Vice President Pence made what analysts called a “hawkish” speech on the issue.
Anyone hoping for a lazy Thursday afternoon got the rug pulled out from under them when AMZN reported. It’s not often when you see a stock fall $132 in a few minutes, but AMZN investors witnessed that in post-market trading after AMZN’s earnings per share missed third-party consensus expectations and the company’s guidance disappointed. Cloud business revenue also came up short of Wall Street’s projections, with Amazon Web Services (AWS) rising 35%.
Shares of AMZN were down 6.5% early Friday.
The problem with AMZN’s Q4 guidance for revenue in a range of $80 billion to $86.5 billion—well below the street’s average estimate of $87.4 billion—is that it potentially raises eyebrows about the holiday shopping season. That’s really surprising given the health of the consumer, and it threw people for a loop.
Other stores reporting so far are guiding higher and showing signs of a healthy consumer. Maybe people are just shifting from AMZN to competitors, or maybe there’s something about brick-and-mortar stores that people like. Obviously, you can’t say there’s a trend here based on one weak quarterly outlook from AMZN, however.
AMZN’s disappointing outlook might mean investors pay even closer attention to outlooks from Apple (AAPL) next week and major retail stores in November to see if this is a trend or just something isolated to AMZN.
It’s also possible that AMZN’s revenue outlook softness could reflect deceleration in AWS growth, so it’s not necessarily all about AMZN’s shopping business.
Better earnings news after Thursday’s close came from Technology giant Intel (INTC), which jumped 3% in pre-market trading as the company absolutely slayed it, beating analysts’ expectations on top- and bottom-lines. To make a good story even better, INTC’s guidance outpaced the Street’s projections. Notably, too, the company’s chip sector revenue came in higher than analysts had expected, and that is an important sign because there’s a lot of nervousness around chipmakers following softness from competitor Texas Instruments (TXN).
INTC’s results capped a really solid Thursday for semiconductor stocks, which appeared to get a spark from a research firm’s positive report.
Visa (V) also looked solid, beating consensus on earnings and matching on revenue. Payments volume adjusted for foreign currency rose 9%, and that’s an amazing number.
That followed a 9% jump in PayPal (PYPL) shares yesterday, so the payment industry looks like it’s in good shape so far. Maybe that can ease some of the concerns around AMZN regarding the consumer.
By the end of this week we’ll be close to halfway through earnings season. So far, things have been better than many anticipated, but overall results are still lower than a year ago for the companies reporting to date. AMZN’s quarter doesn’t help.
As of late this week, average earnings per share were down more than 2% year-over-year, but that’s better than the 4% decline that Wall Street had anticipated entering the season. Some analysts think when all is said and done, the final results will be flat to 1% lower, still likely the third-straight quarter of earnings declines but definitely better than anticipated.
On the plus side, average revenues have risen 3.1%, and 82.3% of reporting firms have beaten EPS estimates while 63.7% beat revenue estimates. Revenue growth is actually a little better sequentially, and the proportion of companies beating EPS and revenue estimates is the highest since Q2 2018. However, when you hear about estimates, keep in mind that the bar was set pretty low coming in. That takes some of the thrill away.
The Industrials sector looks particularly vulnerable right now to worries about the global economic environment, with several major companies taking their outlooks lower this week. The latest was 3M (MMM) on Thursday morning. Their results appeared related to continued fallout from the U.S.-China trade dispute. What it’s showing us is that the tariff situation continues to be a major concern for companies in how to spend their money.
TWTR seemed to give the entire Communications Services sector a hangover Thursday ahead of Facebook (FB) earnings next week and VZ today. FB remains a popular target in Washington, D.C., after its founder’s testimony earlier this week, and it’s unclear if next year’s election can bring it any relief from bipartisan pressure.
Speaking of VZ, earnings looked solid as the company beat expectations for EPS and revenue. Shares rose about 1% in the pre-market hours Friday.
The market on Thursday went lots of different directions. Nasdaq (COMP) rose 0.8%, helped by solid earnings from Microsoft (MSFT), PayPal (PYPL), and Tesla (TSLA). The Dow Jones Industrial Average ($DJI) got pulled down by 3M (MMM) after its outlook got a negative review from investors. The S&P 500 Index (SPX) continued inching up, but didn’t seem disposed toward a test of all-time highs less than 1% above current levels.
Key earnings to prep for on Monday include AT&T (T) and Alphabet (GOOGL). The Fed meeting begins Tuesday.
FIGURE 1: FORTUNE TELLERS? The Dow Jones Transportation Average ($DJT-candlestick) and the Russell 2000 small-cap index (RUT-purple line) are sometimes seen as barometers for the broader economy, particularly on whether the near future looks weak or strong. Both have traded pretty much in sync year-to-date, and both are pointing up lately. However, they’re also near recent highs, so next steps could be important. 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.
Why the Hesitation? If it feels frustrating to watch the market stall at current levels, remember that earnings are the keystone and probably help explain the lack of a rally to new highs. Right now, analysts expect Q3 earnings to fall more than 2% year-over-year and are dialing back expectations for Q4 and 2020 earnings growth. Consensus estimates from S&P Capital IQ earlier this week project Q4 earnings per share to rise 1.7%, down from the previous estimate of 3%.
The same report showed full-year 2020 earnings per share rising 9.6%, down from the previous projection of 10.2%. There might be some muscle memory around this, with investors remembering how quarterly estimates often trended lower over time this year. That could have some people thinking earnings projections could get worse from here, and the market’s price-to-earnings ratio is already above the five-year average.
What’s Wrong with Hitting a Double? Generally a double is a great outcome if you’re playing baseball. You’ve hit one down the line, it bounces around, and by the time the outfielder throws the ball back in, you’re standing on second base. It’s not a home run, but if you hit enough doubles, the paycheck tends to be excellent. When it comes to earnings, however, sometimes a quarterly result equivalent of a solid double isn’t considered good enough.
Consider Comcast (CMCSA), whose shares fell more than 2% on Thursday despite beating analysts’ estimates on earnings and revenue and also surpassing expectations for high-speed internet customer adds. The only thing that seemed slightly lacking in the numbers was free cash flow, but it would be odd to convict them based only on that. Still, the stock is down. Why? Maybe because shares had already risen about 36% year-to-date coming into earnings and they didn’t hit a home run. It’s something to consider for any company with a high-flying stock as it approaches earnings. If CMCSA had only been up 2% or 3% so far this year, the stock might have been rewarded based on these earnings numbers. But they’d already been rewarded a lot this year and that’s a risk for some companies.
Communications Break Down: The worst-performing S&P sector by far on Thursday was Communications Services, down more than 0.8%. This happened as investors processed disappointing results from Twitter (TWTR). There was no relief rally all day Thursday for TWTR. The stock just kept sinking, and by the last hour of the day, its shares looked like a tired boxer just waiting for the round to end and hoping to regroup Friday with some new energy. Still, if you listened to the call and checked the earnings, there are some legitimate questions about the business.
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