Mixed Earnings Results Leave Investors Looking for Direction This Morning

Our chief market strategist breaks down the day's top business stories and offers insight on how they might impact your trading and investing.

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5 min read
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Key Takeaways

  • Caterpillar misses on top, bottom lines

  • Boeing says it still expects to increase 737 Max production
  • Texas Instruments expects Q4 revenue to be below estimates

(Wednesday Market Open) Earnings season is in full swing, and big-name company results have continued to be mixed. 

Caterpillar (CAT) reported earnings and revenue that both missed Wall Street analysts’ expectations and lowered its full-year earnings guidance. The heavy equipment maker said end-user demand was weaker than expectations and volumes declined amid a reduction in dealer inventories. It also said weakness could continue amid “global economic uncertainty.”

Given its exposure to China, CAT has been considered an indicator for how well things are going in the trade dispute between the United States and the Asian nation, which has been a drag on the global economy. The company’s shares were down 1% in pre-open trading. 

While a miss by CAT could be a sign of broader economic issues, another company that’s been considered a trade proxy is having more company-specific troubles. Boeing (BA) missed on earnings by a pretty substantial margin—adjusted earnings of $1.45 per share versus a consensus estimate of $2.09—but revenue was a bit above forecasts.

The airplane maker was more optimistic in its timeline for when the 737 Max might return to service than U.S. airlines have been. And BA said it continues to plan on increasing its production of the troubled airliner by the end of next year. 

Also, order backlog remains high, meaning cancellations have not been as pronounced as some may have expected in light of the 737 MAX debacle. Perhaps that’s why, along with its plans on increasing 737 Max production, BA shares are still hanging in there despite the dismal earnings print. Though BA shares traded down about 3% on the headline, they quickly regained composure, and pointed higher by more than 1% premarket. 

It seems that while BA’s shares are trading higher, it’s a nervous higher, as any piece of negative news could send shares sprawling. 

Meanwhile, Texas Instruments (TXN) shares were getting beaten like a rented mule—down about 8% premarket—after the company missed revenue estimates and said it expected Q4 revenue to be below estimates. Like Caterpillar’s lowered guidance, TXN’s forecast is a disappointing sign for the global economy as the chipmaking space is often another proxy for the tariff situation with China.  

In results from another closely watched stock, Chipotle Mexican Grill (CMG) reported top and bottom lines that beat Wall Street estimates. Its shares originally climbed higher on the news but then fell into negative territory. 

Brexit Drama Continues

The three major U.S. stock market indices couldn’t hold on to gains Tuesday amid pressure from overseas and domestic news. 

Lawmakers in Britain voted to consider Prime Minister Boris Johnson’s Brexit deal but also voted against a rapid timetable for the divorce. The extended timetable means that the market likely will have to deal with Brexit uncertainty for longer, rather than having it over and done with.

If there’s anything the market doesn’t like, its uncertainty. And without much to move the needle on the other main geopolitical headwind facing the market—the U.S.-China trade war—it seems like investors focused on Brexit worries. 

Earnings a Mixed Bag

On the home front, earnings for big-name companies that affected the market Tuesday were mixed.

McDonald’s (MCD) shares declined after the fast food chain missed consensus expectations for earnings and revenue. Travelers (TRV) solidly missed earnings estimates, and its shares got taken out to the woodshed. 

Meanwhile, Procter & Gamble (PG), beat consensus estimates on top- and bottom-lines and raised its outlook, and United Technologies (UTX) also beat expectations on earnings and revenue, and upped projections. 

While there have been some notable misses, most of the S&P 500 Index (SPX) companies that have reported so far have beaten expectations. That might be cold comfort given that expectations for this earnings season were pretty low. Still, although the SPX couldn’t hold the 3000 level Tuesday, its muted decline didn’t take it much below that psychologically important mark. 

Earnings Season Rolls On

In other headline earnings news, investors are expecting to hear from Microsoft (MSFT)and Tesla (TSLA) after the close today. 

Last time out, MSFT reported earnings and revenue that beat Wall Street’s estimates. Its guidance also was above where analysts had expected. We’ll have to see if MSFT can deliver a repeat later today. Some analysts point out that MSFT faces a tough comparison to fiscal Q1 a year ago, when revenue rose 19%.

One question for MSFT is whether cloud growth this spring and summer might have gotten hurt by the slowing global economy. It seems likely that investors will want to know what MSFT has to say about the U.S.-China trade battle. Another potential topic MSFT might be asked to address on the call is capital expenditure levels, which reached a four-year high in fiscal Q4.

Separately, when Tesla (TSLA) reports earnings Wednesday after the bell, investors will likely continue to look for clues about whether the electric vehicle maker will be able to meet its full-year vehicle delivery forecast. They’ll probably also look at TSLA’s cash flow and whether it is getting closer to returning to profitability.

But there also seems to be a little bit of extra tension going into this Q3 earnings report as Wall Street analysts are predicting the company might see its first decline in yearly revenue in years. If third-party analyst projections of $6.34 billion in revenue turn out to be on target, it would be TSLA’s first annual drop in revenue since 2012. As for the bottom line, analysts are expecting a loss of 41 cents per share.

FIGURE 1: CRUDE, ENERGY SHARES SLOSH HIGHER. The Energy sector (IXE - purple line)  was the best performing SPX sector Tuesday, rising more than 1.3%. Energy companies seemed to get a boost as oil futures prices (/CL - candlestick) moved higher on a Reuters report saying OPEC and its allies will consider deeper crude supply cuts at their meeting in December. Data sources: S&P Dow Jones Indices, CME Group. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Existing Home Sales Sink:The latest data on the U.S. housing market wasn’t much to write home about. September existing home sales fell to a seasonally adjusted annual rate of 5.38 million from an upwardly revised 5.5 million the previous month. The headline number was weaker than 5.52 million expected in a Briefing.com consensus. Last time around, lower mortgage rates apparently encouraged more buyers to sign above the dotted line in August. But as the new data show, homes are still expensive, with the median existing single family home price up 6.1% from a year ago. And inventory is tight, creating another headwind for sales. “Upward pressure on prices is likely to persist as inventory of unsold homes continues decreasing from last year's levels,” Briefing.com said.

Will New Home Sales Too?Later this week, we get another data point on the housing market. September new home sales are expected to increase to a seasonally adjusted annual rate of 720,000 units from 713,000 units in August, according to a Briefing.com consensus estimate. A question is whether the new homes sector will see a repeat of what happened in the existing home market in September. Will rising prices and tight inventory dampen buyer demand that would otherwise be higher because of lower mortgage rates? As we saw last week, September housing starts came in weaker than expected, at a seasonally adjusted annual rate of 1.256 million units. That was below a Briefing.com consensus of 1.306 million.

How Long Can Oil Gains Last? While oil prices got a boost Tuesday from reported potential supply cuts by OPEC and its allies, the support may not be long-lived. The Reuters report went on to say that the oil producing nations will consider the production cuts because of worries about weak demand growth next year. That fits with a narrative that has helped keep a cap on oil prices: Investors fear that a continued trade war between the U.S. and China will dampen global growth and thus demand for black gold. So it seems that the biggest and most meaningful boost to oil prices—and the stock market for that matter—would only come if the world’s two largest economies finalize a full trade pact. 

Good Trading,

JJ

@TDAJJKinahan

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

  • Caterpillar misses on top, bottom lines

  • Boeing says it still expects to increase 737 Max production
  • Texas Instruments expects Q4 revenue to be below estimates
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