Carry the Tune: Bank of America Keeps Things Humming as Focus Turns to Netflix

Bank of America became the fifth major bank to report so far this earnings season, and it came in with better-than-expected results. The spotlight shines on Netflix this afternoon.

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Key Takeaways

  • Bank of America earnings top expectations, continuing strong bank results

  • Hopes are growing for a resolution on Brexit before the Oct. 31 deadline
  • Netflix reports after the close, putting streaming world into focus

(Wednesday Market Open) Major bank earnings go from yesterday’s quartet to today’s solo act, but Bank of America (BAC) carried along the tune with better-than-expected results. Despite that, major indices turned lower in futures trading following Monday’s sharp rise. 

BAC appeared to benefit from both higher investment banking fees and net interest income as it beat third-party estimates on earnings per share and revenue. Consumer banking and equities trading looked strong, too. The stock got a lift of about 2% in pre-market trading not only from earnings results, but also from media reports that Warren Buffett's Berkshire Hathaway (BRK) is seeking permission from the Fed to increase its stake in the bank to more than 10%. 

Outside of earnings, there’s a lot going on. Officials and diplomats said that differences over terms of the U.K.’s proposed split from the E.U. narrowed significantly on Tuesday. A two-day summit of EU leaders begins in Brussels on Thursday, the last meeting scheduled before the fast-approaching Oct. 31 Brexit deadline. Stay tuned.

A little concern seems to be creeping in on the China trade front this morning amid reports that China might retaliate if Congress passes a bill supporting Hong Kong protesters. It’s still a long, winding road to a deal even though last week appeared to show progress.

Even with geopolitics dominating headlines, the S&P 500 Index (SPX) is up four of the last five days. That partly reflects what looks like a solid start to earnings season. Through Tuesday morning, 34 S&P 500 components had reported Q3 numbers. Of those companies, 29 have topped analyst expectations, data from research firm The Earnings Scout show.

Things weren’t so hot, however, with retail sales for September. They fell 0.3%, the first drop in seven months. While that might raise questions in some quarters about consumer health, one thing to consider is that retail sales still rose more than 4% year-over-year. One report isn’t a trend, so October’s data arguably become even more important when they arrive next month.

The big earnings kahuna after today’s close is arguably Netflix (NFLX). The streaming giant has seen shares fall about 27% since reaching a 12-month peak in May as rivals have entered—or merely threatened to enter—the online streaming world that the company has long dominated.

Last time out, NFLX said in its Q2 conference call that gains in paid memberships rolled in at a disappointing 2.7 million new subscribers. That’s far below earlier comparisons, and well below the five million the company had projected.

On the earnings call this afternoon, investors are likely to pay close attention to the company’s Q4 forecasts on membership and content expectations, and also for any more word about NFLX’s global expansion plans.

Close But No Cigar

That was the story Tuesday as the S&P 500 (SPX) rang up a 1% gain for the session but couldn’t manage a finish above 3000. It did nose above that level for a while intraday, lifted in part by a relatively strong first day of earnings season and rising hopes that a Brexit deal might be near. 

Some of the big gainers Tuesday included three of the four major Financial firms reporting that morning. JP Morgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) helped the Financial sector have a top-three day on the sector leaderboard. For the most part, the banks appeared to confirm strength among consumers. Lending and credit card businesses seem to be doing well.

Healthcare chalked up the biggest gain of the 11 official S&P 500 sectors yesterday after solid earnings and higher guidance from UnitedHealth Group (UNH) helped put a charge into the health insurance segment. Johnson & Johnson (JNJ) was another healthcare company that raised its forecast and saw shares climb.

Semiconductor shares also skyrocketed Tuesday to a new all-time high with a better than 2% gain for the PHLX Semiconductor Sector. Nvidia (NVDA) led the run with a 5% jump after an analyst raised their firm’s price target for the stock.

Positive Outlooks—So Far

Something to consider keeping in mind is that Tuesday was just the first day of reporting. If earnings season were a football game, we’d be about two minutes in with 58 minutes left to play. It’s nice if your team is leading at that point, but it doesn’t necessarily mean much by the fourth quarter.

What is good to see, at least so far, is that companies are sounding positive looking forward. United Airlines (UAL) became another firm to raise its earnings forecast after the close yesterday. We could get more color about how UAL sees the travel industry in its call later this morning.

Better-than-expected forecasts from some companies might have been a surprise for any investors afraid that a trade-war induced slowdown could be underway. Instead, we got, “No, the future looks good.” Still, we’ll have to see if this continues as earnings season really ramps up. 

China Trade Takes Backseat For Now

So far early this week, earnings have nudged China and tariffs away from the meat and back toward the side dishes on many peoples’ plates. However, the issue came up on Goldman Sachs’ (GS) earnings call Tuesday after the company’s quarter seemed to disappoint investors, judging by the market reaction. GS said on the call that trade war concerns hurt sentiment and helped lead to sharply lower global interest rates over the summer. Brexit was another factor that might have hurt investing during the period, GS said.

What’s nice is that with earnings underway, the market has something solid under its feet to focus on even as uncertainty around trade with China continues. Last week’s trade truce was more about kicking the ball down the road, with the U.S. agreeing not to raise tariffs that had been expected to go up this week and China vowing to buy more U.S. agricultural products. None of that really moves the yardstick much.

So far, there really isn’t any pen to paper between China and the U.S.; it’s just people talking and nothing definite. The earnings are definite.

FIGURE 1: YIELD BAROMETER? If you follow Treasury yields, it might be a good idea to also keep an eye on Technology shares. This three-month chart comparing the S&P 500 Technology sector (IXT-candlestick) to 10-year Treasury yields (TNX-purple line) shows a correlation where both tend to rise at the same time, though causation isn’t clear. One theory is that when yields rise, it signals more investor confidence in the economy and more willingness to jump into aggressive sectors like Technology. Data Source: S&P Dow Jones Indices, Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. 

Regional Checkup: Buried under all the earnings news yesterday was a decent regional manufacturing report, as the Empire State Manufacturing read for early October came in at 4.0. That shows expansion, and was up from 2.0 the prior report and way above consensus expectations for a negative number. The report actually came out a bit ahead of schedule, though that didn’t affect the readings. Shipments was the main gainer, jumping 7.2 points. This normally isn’t the most closely-watched report, but after that weak national manufacturing index slammed the market a couple of weeks ago, yesterday’s data got more attention than usual. For more regional analysis of economic activity, the Fed’s Beige Book is due later today.

Building Blocks: The next major economic data are due Thursday morning when we’re scheduled to get a look at housing starts and building permits for September. This is a big one to watch, because we’re coming off a really nice bump in August. The question is whether that continued into September as mortgage rates stayed low and consumers continued to look relatively healthy. You can never make too much out of one month’s data, but two months might start to tell you something.

Last time out, single-family permits rose 4.5% on the month and for the year, something Briefing.com called “especially notable” because permits are a leading indicator. Builders don’t tend to get orders for new homes if people don’t feel secure in their jobs and about the economy as a whole. For September, analysts expect housing starts to come in at an adjusted annual rate of 1.34 million and permits at 1.36 million, Briefing.com said. Yesterday, WFC reported a $5 billion increase in home lending originations during Q3 from the prior quarter, saying this resulted primarily from lower mortgage rates.

Tracking Company Concerns: FactSet had an interesting research note this week in which it went over the transcripts of 22 earnings calls early this season to see which negative factors company executives were citing the most. So far, it’s foreign exchange that’s been “a factor that either had a negative impact on earnings or revenues in Q3 or is expected to have a negative impact on earnings and revenues in future quarters,” FactSet said.

Of the 22 companies FactSet surveyed, half cited foreign exchange having a negative impact. Other factors mentioned by seven companies or more included weather, Europe, and wage and labor costs. China and tariffs were relatively low on the list, with only five mentioning that. However, we could hear more on that subject  as we head into the heart of earnings season and more Technology, Materials, and Industrial companies report. IBM (IBM) and Alcoa (AA) this afternoon might be interesting for their views on the subject, along with CocaCola (KO) later this week.

Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • Bank of America earnings top expectations, continuing strong bank results

  • Hopes are growing for a resolution on Brexit before the Oct. 31 deadline
  • Netflix reports after the close, putting streaming world into focus

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