Earnings Parade Rolls Along With Positive Tidings From GE, Honeywell

Earnings remain the focus early Friday as investors peruse results from General Electric (GE) and Honeywell (HON). OPEC meets this weekend and a boatload of earnings next week.

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(Friday Market Open) The positive earnings flow continued Friday as General Electric (GE) became the latest major company to beat Wall Street analysts’ earnings-per-share projections, though it missed on revenue. Shares of the struggling industrial conglomerate rose more than 3% in pre-market trading, while the overall market appeared to have a mixed tone going into the final day of this action-packed week.

The power market continues to be challenging for GE, with revenue there taking another big hit in Q1. Still, the company said in a press release that it’s seeing “signs of progress” in its performance including strength in some of its other businesses, and it kept its 2018 outlook and dividend unchanged. Though it’s encouraging that GE didn’t tweak its dividend or outlook, the company’s turnaround efforts — which include a multi-year plan to improve GE Power as well as exiting more than $20 billion worth of business over the next several years — are going to take time.

If you’re a long-term investor and think GE doesn’t matter to you personally, check your mutual funds. GE is one of the more common holdings, so many investors have a stake in the company’s attempts to right the ship.

GE got the headlines early Friday, but don’t forget Honeywell (HON). That company beat Wall Street analysts’ projections on both earnings and revenue. HON said it still wants to deploy capital toward mergers and acquisitions (M&A) but doesn't see any immediate targets.

In the Overnight Hours and Early Friday

Looking at the broader picture, pre-market trading pointed to a mixed start Friday. None of the three major indices showed much movement from the flat line following Thursday’s declines. It is worth noting that stocks did show some vigor in the last half hour of trading yesterday, so we’ll see if that momentum continues into Friday. Asian shares fell overnight, and Europe was also a mixed bag, so there’s not much direction coming from overseas. Things could get more interesting across the pond next week as the European Central Bank (ECB) holds a monetary policy meeting scheduled to conclude Thursday.

In one interesting development early Friday, President Trump tweeted that oil prices are “artificially very high” and called out OPEC, evidently referring to OPEC’s output restrictions. Oil fell slightly after the tweet. It’s unclear, though, if the tweet led to the drop in prices. OPEC meets this weekend.

Checking Thursday’s action, stocks sagged despite earnings season mostly continuing its winning ways. Profit taking apparently came in after the S&P 500 (SPX) climbed above 2700 earlier this week. It seems like many investors start worrying once the SPX hits that level, and the SPX closed just below it.

The 10-Year Yield Conundrum?

Another thing investors might be worried about is the rise in benchmark 10-year yields, which climbed above 2.9% again Thursday and remained there early Friday. Arguably, the market is between a rock and a hard place when it comes to the interest rate complex. When yields rise above 2.9%, people seem to start getting concerned about possible rising interest rates and the potential for an overheating economy that might bring inflation. When benchmark yields fall, however, the worry starts to be about the narrowing yield curve and how that’s been a recession indicator over many decades, though obviously past isn’t precedent.

Looking at the overall market Thursday, however, there didn’t seem to be any really self-evident reasons for stocks to lose ground the way they did. Crude oil prices did rise to nearly $70 a barrel early in the day, but then fell back to close lower, below $69. Volatility gained strength with the VIX rising above 16, but there wasn’t a huge push to the upside.

Arguably, the lower bond prices might be a positive sign that some investors feel willing to take on more risk. The same might be said for the rise in bitcoin futures Thursday. Investors also embraced financial sector stocks yesterday as bond yields rose, and American Express (AXP) reported robust earnings. Still, the financials couldn’t get info tech to play along, and other momentum sectors like industrials and consumer discretionary retreated.

Tech, Staples Sectors Hit Thursday

The tech sector took a hit in part from weakness in semiconductors. Taiwan Semiconductor Manufacturing Company (TSM) lowered its full-year revenue guidance on softer smartphone demand and uncertainty over the cryptocurrency mining market, according to Investor’s Business Daily and other media outlets. Shares of TSM customer Apple (AAPL) appeared to get wounded by the TSM guidance, as did Intel (INTC). However, phone demand still seems to be strong according to many metrics, and so does the gaming industry. Keeping these factors in mind, it’s possible the slump in semiconductors and tech yesterday related to TSM might turn out to be a blip.

Also on the tech side, Twitter (TWTR) got a bunch of upgrades last night and has quietly had a nice little run over the past few weeks.

FIGURE 1: STAPLES SLUMP.

Consumer staples (candlestick) had their worst day in a while Thursday, falling more than 3% due in part to weakness in Philip Morris (PM). Staples have struggled all year, and are down pretty sharply overall since Jan. 1 compared to about flat for the S&P 500 Index (SPX, purple line). Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Taking Count: With oil prices at three-year highs due in part to OPEC’s continued output restrictions, U.S. crude production arguably becomes more important. That’s especially true this time of year, with U.S. driving season approaching and gas prices at $3 a gallon in parts of the country. Today’s weekly oil rigs report from Baker Hughes could help investors get a better sense whether U.S. producers, spurred along by high prices, are increasing their output goals. Last week, the Baker Hughes report showed five rigs added in the U.S., and total rig count up a hefty 161 from a year earlier. U.S. oil production has soared to a historic high of 10.5 million barrels a day, so it’s unclear how much more can be sucked out of the ground. These weekly rig reports could start to swing a bit more weight if oil prices stay high.

PM Gets Smoked: Among stocks hit hardest yesterday was Philip Morris (PM), whose shares fell 15% after beating earnings but announcing slower than expected growth in its IQOS product line. IQOS, which is a hand-held device that heats tobacco but doesn't burn it, enjoyed robust growth in recent quarters, but last quarter added a mere 3% to overall volume.

PM was one of the drags on the consumer staples sector, which fell more than 3% for the day. PM’s steep losses could re-emphasize a factor we’ve been talking about lately. Namely, many stocks appear to be “priced for perfection,” and any less than positive news could be greeted with a sell-off even if a company’s overall earnings report beats expectations. That’s why caution might still be warranted even when a given company comes in with solid numbers.

Still Early...But: Earnings season just began so it’s really early to start drawing conclusions, but the tidings look generally good so far.  According to Thomson Reuters, 79% of the S&P 500 companies that had reported by mid-week surpassed earnings expectations. Meanwhile, 83% of those companies topped sales estimates. Those figures are both well above historic averages. It was particularly enlightening to see strong reports from United Continental (UAL) and railroad company CSX (CSX) earlier this week. The transports remain a decent canary in the coal mine for the broader economy. Some say it¹s an old-fashioned notion, but goods still need to get from Point A to Point B, and railroads are still a backbone of the country's transportation structure.

Good Trading,
JJ
@TDAJJKinahan

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