Investors Appear Optimistic Amid Earnings Season, Ahead of GDP Data

As companies generally are reporting stronger-than-expected earnings, investor optimism seems to be driving the market higher.

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Key Takeaways

  • Companies generally reporting better-than-forecast earnings
  • Eli Lilly, Verizon, Google trading higher after earnings reports
  • Rising 10-year yield seems to help financial stocks on Monday [Rising 10-year yield seems to help financial stocks on Monday]

(Tuesday Market Open) Today marks day two of what’s been called the busiest week of this earnings season, and investor sentiment appears to be buoyant as the earnings tide continues to rise. For the time being, talk of tariffs, trade and currency wars have taken a back seat to strength in earnings numbers.

Companies generally are reporting stronger-than expected earnings, according to Thomson Reuters data, and optimism seems to be in the driver’s seat, with worries about ongoing trade disputes between the United States and key trading partners apparently packed in the trunk for a while.

Earnings Roundup

Tuesday’s trading day started long before the sun appeared in the eastern sky, with a number of firms reporting earnings early this morning. After reporting solid earnings, shares of drug maker Eli Lilly (LLY) rose more than 5% in the pre-market, to its highest level since the final days of the turn-of-the-century equity bubble. In addition to the earnings report, the street seemed to be applauding a CNBC report of a potential IPO of the company’s Elanco Animal Health unit.

Dow Jones Industrial Average component Verizon (VZ) shares also saw a lift ahead of the bell, on adjusted earnings of $1.20 a share, above a consensus estimate of $1.14. The telecom sector has been sitting on the sidelines during the most recent rally, with the sector off about 12% year-to-date. Strong earnings from telecom biggies such as VZ and AT&T (T), which reports after the bell today, might help breathe some life into the sector.

Fellow Dow components 3M (MMM) and United Technologies (UTX) also reported earnings that topped consensus estimates this morning.

Shares of Harley-Davidson (HOG) were up about 5% in the pre-market after the motorcycle maker reported adjusted earnings of $1.52 a share, above consensus of $1.34. Revenue came in at $1.577 billion vs. consensus of $1.42 billion. Recall that the motorcycle giant made headlines last month, amid all the trade talk, after saying it would move some production out of the U.S. due to tariffs. Europe is HOG’s largest market aside from the U.S.

Financials Gain Footing

On Monday, financial stocks led the S&P 500 (SPX) higher as investors were apparently encouraged about the sector as Treasury yields rose. Rising yields typically can help banks if what they earn on longer-term loans rises faster than what they pay on deposits. (See more about banks and yields below.)

Banks have apparently been struggling recently as the yield curve has been flattening, which also has raised worries about what that could mean for the wider economy. By last week, the yield difference between 2-year and 10-year treasuries had fallen to about 25 basis points. Yesterday the yield spread widened to 32 basis points. While it’s too soon to tell if the curve might continue to steepen meaningfully, Monday’s rise in the 10-year yield, coming on the back of solid earnings reports seen in the banking sector, seems to have helped the sector.

Meanwhile, the tech-heavy Nasdaq Composite (COMP) also posted gains, helped by Google’s parent company Alphabet (GOOG, GOOGL). GOOGL shares rose more than 1% ahead of Alphabet reporting earnings.

A Big Earnings Beat for Google; Eye on Tech

After the close, the tech behemoth reported adjusted earnings that handily beat Wall Street expectations. The results, which included revenue growth in advertising as well as the category that includes its cloud business, appeared to help send Google shares up more than 4% in pre-market trading, breezing past all-time highs, even though a recent fine by the European Union resulted in non-adjusted earnings per share being sharply lower than some expectations. 

Earnings for Google, often considered a bellwether for the tech sector, come ahead of results for two other big tech names this week. Facebook (FB) reports after the close on Wednesday, and Twitter (TWTR) reports before the open on Friday. Amazon (AMZN), which isn’t part of the S&P 500 information technology sector but nevertheless is heavily involved in the tech space, reports earnings after the close on Thursday. 

So it remains to be seen whether those companies might post as solid earnings as Alphabet. (See more on earnings expectations below.)

FIGURE 1: KNOCKING ON THE 3% DOOR. The Cboe 10-year Treasury Index (TNX), which tracks 10x the 10-year rate, has surged about 10 basis points since last week. Recall the 10-year spent a few days north of 3% this spring before falling back to 2.8%. A resurgent 10-year seems to have given a lift to the financial sector Monday. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Financials and Yield: The financial sector led the S&P 500 higher Monday as U.S. Treasury yields climbed. Still, despite a jump of more than 2.4%, the yield on the 10-year bond finished the day shy of the psychologically important 3% mark. Even when that yield has risen above that mark recently, it has had trouble staying above it. If the yield stays around 3%, that would likely be a boon for banks, but renewed buying based solely on the yield trade might not happen unless the yield moves meaningfully above 3% and stays above it. If that happens, other sectors could come under pressure on worries about corporate borrowing costs, and utilities especially could face a headwind because they are often considered bond proxies. Still, it’s too soon to tell, and the yield could yet fall back as it did in May (see figure 1 above).

GDP and Earnings: According to a consensus of analysts polled by Briefing.com, the government’s first estimate of Q2 gross domestic product, scheduled for release on Friday, is expected to show annualized growth of 4.1%. That would be more than double the annualized growth shown in Q1. The data come during a busy week for earnings reports. So it may be worth paying attention to comments from company leadership for clues as to the potential economic trajectory going forward. If GDP comes in as strong as some are projecting, and company executives don’t make much of tariffs in upcoming earnings calls, then that could be an indicator that solid economic growth could continue. However, even if GDP comes in strong but executives express worry about tariffs being a drag on growth, that could indicate that trade issues could dampen economic expansion in the future.

Q2 Earnings Rosy So Far: Speaking of corporate earnings, as of Friday investors so far seem to have been encouraged by what they’ve seen so far during this season, according to investment research firm CFRA. Citing S&P Capital IQ data, the firm noted that through Friday the year-on-year growth in Q2 S&P 500 earnings per share was seen at 20.8%, ahead of the 19.5% end-of-quarter estimate. If Q2 earnings per share do indeed beat expectations, it would be the 26th quarter in a row where actual results beat forecasts, CFRA said. “Even though the second-quarter reporting season is still in its early stages, investors have been encouraged by the overwhelming number of firms that have beaten on both the top and bottom lines, as well as the magnitude of outperformance and forward guidance,” CFRA said.

Good Trading, 

JJ

@TDAJJKinahan 

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