Markets Riding Three-Day Rally Into Earnings Season After Monday’s Big Gains

There seems to be a positive tone heading into Tuesday’s session after big gains Monday that took stocks back toward their one-month highs. Inflation data due on Wednesday and Thursday.

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Key Takeaways

  • Futures markets had a firm tone after Monday’s sharp rally
  • S&P 500 is nearing one-month highs
  • Treasury yields are rising, perhaps a sign of investor confidence

(Tuesday Market Open) Wall Street starts Tuesday riding a three-day win streak as major stock indices approach recent highs. Though there’s not much in the way of major new data or geopolitical news, a firm tone prevailed in the futures market before the opening bell following overseas gains.

It might be interesting to see if Monday’s pattern of strength in financials and industrials—two beaten down areas—can continue today. Also, consider watching crude prices, which were up overnight and near new three-year highs. 

Another question is whether yesterday’s Treasury yield strength can roll into the new day. As of early Tuesday, yields were up just a touch. Last but not least, consider keeping an eye on the 2790 area for the S&P 500 (SPX). That’s about where the index topped out last month and it hasn’t traded significantly higher since January.

On the earnings front, PepsiCo Inc. (PEP) earned an adjusted $1.61 a share in Q2, beating the average Wall Street analyst estimate. Revenue of $16.09 billion rose 2% from a year earlier and also beat forecasts. Snack food sales looked strong, but the company’s core beverage business seemed a bit flat. The stock rose more than 3% in premarket trading. 

Banks Back in Business Ahead of Earnings

With big bank earnings season around the corner, financial stocks seemed to find their mojo Monday. Most of the major names rose 2% or more as investors climbed back into the sector perhaps amid hopes for solid Q2 results when reporting begins this Friday. While some of the more well-known names like JP Morgan (JPM) and Bank of America (BAC) helped lead the rally, many smaller banks that handle a bigger chunk of the consumer market also powered ahead. That could signal that some investors hope for strong consumer sentiment that could lead to heavier borrowing for expensive items like automobiles.

The rising tide in financials came as Treasury yields showed signs of life, a factor that often tends to give bank stocks a boost. The benchmark 10-year yield climbed to nearly 2.86% by the end of the day Monday and reached 2.87% early Tuesday after sinking to around 2.83% last Friday. Meanwhile, two-year yields rose, but a little less. That means the gap between two-year and 10-year Treasury yields climbed a little. Still, the gap remains narrow historically and investors might want to continue watching it. In the past, an “inverted” yield curve has sometimes occurred at the same time as recessions, though correlation isn’t necessarily causation.

Rising rates could reflect a couple of factors. First, the bullish payrolls report last Friday might have boosted perceptions that the economy is swimming right along. Second, concerns about a trade war faded a bit over the last few days. Though a long-term trade dispute between China and the U.S. is obviously still possible and could be a bitter pill for both countries, there seems to be a sense that so far tariffs have been on the light side. Some analysts voiced hope that the U.S. and China, as well as the U.S. and Europe, might be able to reach compromises. We’ll have to wait and see.

Don’t Forget Brexit

Also looking overseas, there was some action on the Brexit front Monday as British Foreign Minister Boris Johnson resigned. Johnson’s departure, which followed that of another pro-Brexit minister of Prime Minister Theresa May’s government over the weekend, helped lead to more debate in the media about whether there will be a “hard” or “soft” Brexit. The mood on Wall Street Monday, anyway, was that the departures could point toward a “softer” Brexit that perhaps could lead to less turmoil for the markets, but again, that remains an open question.

In other sectors, industrials, energy, and info tech all finished solidly higher Monday. The strength in financials and industrials was a change of pace following a recent slump. However, utilities—which had surged recently—fell with a thud Monday, toppling more than 3%.

There was positive data news Monday as the Consumer Credit report for May showed an increase of $24.6 billion, well above Wall Street analysts’ estimates. The surge in credit expansion could serve as a catalyst for a pickup in consumer spending that might factor into a strong Q2 GDP number, Briefing.com said in a note to investors. More data are due Wednesday as investors brace for the June Producer Price Index (PPI). Analysts surveyed by Briefing.com predict a mild 0.2% rise in core PPI, down from 0.3% a month earlier. 

Jumping Back into Equities

In another development Monday, the Investor Movement Index® rose to 5.45  in June from 5.06 in May as retail investors gradually increased their equity exposure throughout the first six months of 2018, TD Ameritrade announced. TD Ameritrade clients reduced their overall exposure to equity markets the first four months of the year, but started to dial-up exposure once again in May and June. This gives a sense that although the market has been back-and-forth, clients may be feeling better heading into the end of the year and may continue to increase exposure in a very measured fashion.

The Investor Movement Index, or the IMXSM, is a proprietary, behavior-based index created by TD Ameritrade that aggregates Main Street investor positions and activity to measure what TD Ameritrade investors actually have been doing and how they have been positioned in the markets.

FIGURE 1:  Green Still in Green: The U.S. dollar index (candlestick) has leveled off recently but remains positive over the last three months. Meanwhile, gold (purple line), continues to struggle, partly due to the impact of a stronger dollar. The gap narrowed a bit after Friday’s payrolls report, which analysts said didn’t appear to show any data that might lead the Fed to quicken its rate hike strategy. Data Sources: ICE, CME Group. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Earnings Preview: Q1 saw S&P 500 companies deliver better than 20% earnings growth. With the market on the cusp of Q2 earnings season, research firm CFRA predicts 19.5% earnings per share growth in Q2, led by the energy, materials, financials, and information technology sectors. Eight of the 11 sectors in the S&P 500 are expected to post double-digit growth, the firm said. Conversely, the consumer staples and health care groups are projected to post single-digit year-over-year increases, while real estate and utilities record declines. CFRA says EPS growth is still being generated by healthy global economic fundamentals. However, the firm sees strength in the dollar as a headwind and trade issues as a risk.

Wage Generation: Following last Friday’s payrolls report that showed just 0.2% monthly wage growth despite blistering gains in job numbers, analysts scrambled to find possible reasons for the slow wage gains. One piece in the puzzle could be generational. some analysts say. Baby Boomers are retiring in big numbers while the large “millennial” age group continues to enter the job market. These younger workers typically get paid less than the retiring people they’re replacing. Of course, there’s always some of this dynamic at work in the economy, but the “barbell” shape of the big baby boomer generation on one end and the big millennial generation on the other could be exacerbating the trend.

Buyback Binge: Companies in the S&P 500 are on track to repurchase as much as $800 billion in stock this year, which would eclipse the 2007 record, The Wall Street Journal reported recently. Among the biggest buyers are companies like Oracle (ORCL), Bank of America Corp (BAC), and JP Morgan (JPM). However, the S&P 500 Buyback index, which tracks the share performance of the 100 biggest stock repurchasers, has gained just 1.3% this year, underperforming the S&P 500 (SPX). Some analysts the WSJ talked to say they’re worried the companies are buying at relatively high prices, and that the money spent on buybacks could have gone toward capital improvements that could lead to long-term growth. The lesson here might be to stay cautious when companies announce buybacks. Though one idea behind share repurchases is to take shares off the market and raise the price of those remaining, there’s no guarantee such a strategy will work.

Good Trading, 

JJ

@TDAJJKinahan 

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