Taking Off with United: Airliner's Earnings, Easing Yields and Dollar Give Wall Street an Early Lift

(Wednesday market open) Following three days of losses that sent major indexes to nearly two-month lows, stocks turned green early Wednesday despite hawkish words yesterday from Federal Reserve Chairman Jerome Powell. Premarket strength in mega-cap tech and better-than-expected results from United Airlines (UAL) provided a foundation for the early strength, along with a flat Treasury market and solid gains in European shares overnight.

Powell basically told investors what they already know. Inflation isn’t coming down quickly enough. “More recent data shows solid growth and continued strength in the labor market, but also a lack of further progress so far this year on returning to our 2% inflation goal,” he said during a panel discussion.

His words appeared to have little impact on a market that’s already down about 4% from all-time highs set in late March as rate cut ideas get snuffed out of projections. Treasury yields remain near five-month peaks, but upward momentum appears stalled for the moment.

As rate cut hopes fade, company and analyst projections for S&P 500 earnings growth skid. Research firm FactSet projects Q1 S&P 500 earnings growth of 0.9%, down from the previous estimate of above 3%. Still, analysts dial in double-digit earnings growth this year and next, according to FactSet, one element that could keep stocks from falling much further out of bed.

Also, as FactSet noted, historic trends point to Q1 earnings improving from here and possibly ending up with final growth of around 7% year over year. Of the roughly 39 S&P 500 companies reporting through midday Tuesday, 53% beat revenue estimates and 82% outperformed on the bottom line.

Beyond the rate picture, investors could remain on edge today monitoring events in the Middle East, but volatility edged lower early Wednesday.

Both the equity and bond markets “still appear to be in a period of adjustment, or ‘price discovery mode,’” said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. Earlier this year, the bullish narrative driving the market to record highs included a strong U.S. economy, which translates into higher corporate profits, along with expectations for inflation to decelerate and multiple rate cuts from the Fed.

“Now, we’re adjusting to a stronger-than-expected economy, which is keeping inflation relatively elevated and therefore a Fed that is reluctant to move into an easing mode,” he added.

Futures based on the S&P 500® index (SPX) climbed 0.2% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) rose 0.1%. Futures based on the Dow Jones Industrial Average® ($DJI) inched up 0.1%.

Morning rush

• The 10-year U.S. Treasury yield (TNX) was down one basis point at 4.65%.
• The U.S. Dollar Index ($DXY) slipped to 106.23, still near five-month peaks.
• The CBOE Volatility Index® (VIX) eased to 17.94, down from yesterday’s five-month high above 19.5.
• WTI Crude Oil (/CL) fell 0.75% to $84.72 per barrel.
• Bitcoin (BTC) dropped 0.7% to $62,361.

Stocks in spotlight

United Airlines surprised Wall Street late Tuesday by posting a much narrower quarterly loss than expected and reiterating its existing earnings forecast despite being front and center as the airline suffering perhaps the most from Boeing’s (BA) quality issues. Alaska Air (ALK), due to report later this week, is another Boeing customer, along with Southwest (LUV), which reports next week. United shares climbed 5% in premarket trading Wednesday, and other airline shares gained altitude this morning in United’s wake.

United enjoyed a double-digit increase in business demand quarter over quarter. It also made strides in the important category of passenger revenue per seat mile. In what appeared to be a nod to the Boeing issues, United said, “We’ve adjusted our fleet plan to better reflect the reality of what manufacturers are able to deliver.” This includes receiving fewer narrow-body planes this year than it had expected and leasing 35 Airbus (XPAR: AIR) planes. UAL took a $200 million impact to earnings from the Boeing 737 Max 9 grounding “without which the company would have reported a quarterly profit,” United said.

In other earnings news, smaller financial institutions like Northern Trust (NTRS), PNC (PNC), First Horizon (FHN), and Fifth Third (FITB) are on deck. As credit conditions tighten, these companies’ updates on credit quality, loan demand, loan loss provisions, and credit availability could help investors better understand the broader economy. See more below.

Netflix (NFLX) steps to the plate tomorrow afternoon after the streaming company beat analysts’ estimates last time out and reported 13.12 million subscriber adds. Last quarter, Netflix warned that adds could fall from Q4.

Stocks on the move:

• First Horizon rose 4% after its earnings outpaced analysts’ expectations and net interest income improved. It also helped that the company doesn’t see charge-offs—or debt it’s given up trying to collect—rising too much. It’s only one company, but this bodes well for the sector considering credit worries across the industry. “Credit quality remains stable,” the company said in its release.
• Travelers (TRV) fell more than 2.5% after the company missed Wall Street’s earnings per share (EPS) estimates despite beating expectations for revenue. Higher catastrophe losses due to what the company called “severe wind and hail storms in the central and eastern regions of the United States” helped account for the sharp rise in losses, Travelers said.
• J.B. Hunt Transport (JBHT) dropped more than 7% in premarket trading after the company’s earnings missed Wall Street’s profit and revenue forecasts. A “combination of lower volumes and yield pressure” helped lead to the tough quarter, J.B. Hunt said in its press release. Trucking volumes were a soft spot, and costs also rose.

What to watch

Lead on: Leading Economic Index® (LEI) from the Conference Board tomorrow is a data point to watch, considering LEI came in positive in February for the first time in two years. Housing data, however, might keep LEI on the back foot considering the recent climb in mortgage rates. Other aspects of LEI like employment and manufacturing continued to look strong, and may help shape the March report, as well. Analysts expect March LEI to fall 0.1%, according to Briefing.com.

Tomorrow also features Weekly Initial Jobless Claims. Consensus stands at 215,000, according to Briefing.com, still historically low and near recent weekly figures. Continuing claims might be more crucial if they start to grow, perhaps a sign of jobs becoming tougher to find. U.S. unemployment remains historically low below 4%.

Overseas, inflation news from Europe earlier today appeared relatively tame, which may have helped stocks there and kept Treasury yields in check here. Weekly U.S. mortgage applications rose 3.3%, according to the Mortgage Bankers Association, despite the average rate climbing to 6.9% from 6.8%. Key U.S. data tomorrow other than claims is Existing Home Sales for March, which analysts expect to drop slightly from a month earlier.

Tuesday in review:

Major indexes might be getting oversold, at least in the near-term. The charts suffered technical damage over the last week, especially when the SPX closed below its 50-day moving average for the first time since November. When this happens, it can result in spillover technical selling. The SPX held up relatively well most of the day yesterday but couldn’t finish in the green. The fade in the final half hour for both the SPX and the NDX might be more evidence that investors aren’t eagerly buying dips. Info tech rose slightly yesterday and “defensive” sectors like utilities and real estate got hit hard by rising Treasury yields.

Eye on the Fed

Early today, futures traders saw 98% odds the Federal Open Market Committee (FOMC) will keep rates unchanged following its April 30 to May 1 meeting, based on the CME FedWatch Tool. Chances of a quarter-point rate cut following the FOMC meeting in June are seen at around 15%, rising to roughly 42% for the late-July meeting. Chances of a cut in September are around two in three.

Churn, churn, churn: The market’s been anything but placid so far this year at the sector level, with plenty of subsurface churn. Read more about these leadership shifts in the latest post by Schwab’s Chief Investment Strategist Liz Ann Sonders and Kevin Gordon, director, senior investment strategist. 

Thinking cap

Ideas to mull as you trade or invest

Hawk sighting: It almost had to happen, eventually. Investors very briefly projected slim odds—very slim—of a 25-basis point Fed rate hike (not cut) at some point this year. Early yesterday, the CME’s FedWatch Tool put hike probability at 0.1% before going back to 0% later Tuesday. Investors still build in nearly 90% chances of at least one rate cut in 2024, but one Fed policymaker said last week a hike might be necessary if inflation doesn’t come back under control. Yesterday was the first time all year that the market baked in even the slimmest chance of a 2024 rate hike from the current Fed target range of 5.25% to 5.5% that’s been in place since the most recent hike last July. What a contrast from earlier this year when the FedWatch tool built in chances of as many as seven Fed rate cuts this year. A combination of much more robust than expected U.S. economic data and stubborn inflation ganged up on those optimistic ideas among investors, though the Fed was never that hopeful and projected three rate cuts at most. “Most crucially, the Fed’s message has not changed over the better part of the past year; it’s really the market that has continuously gotten ahead of itself in trying to predict the rate-cutting cycle,” said Gordon. “The Fed is not getting more hawkish; the market is getting less dovish.”

Loan watch: A year after spring’s banking industry tremors, smaller financial institutions begin reporting earnings this week just as tightening credit conditions raise new concerns about industry health and the U.S. jobs market. Many of these institutions continue to carry so-called “underwater” loans on their books, with actual values below their loan balances. Banks are often forced to write these loans off, hurting their bottom lines and making them averse to writing up fresh loans. Also, stubbornly high interest rates tend to hurt demand for loans, potentially slowing growth for the small businesses that borrow from these regional institutions. The next Fed Senior Loan Officer Opinion Survey on Bank Lending (SLOOS) is due early next month and might help investors better understand the loan landscape, along with the potential impact on small business health. Smaller companies often get overlooked on Wall Street but can be the backbone of a healthy labor market. They employ 46.7% of private sector U.S. employees, according to the U.S. Small Business Administration, and problems there could potentially spill over into Weekly Initial Jobless Claims and the closely watched monthly Nonfarm Payrolls reports.

Talking technicals: If the SPX continues selling off, the next support level appears to be in the 5,000 range, or just below that at 4,987, because that represents the 23% Fibonacci Retracement level from the October low to the April high (it’s been a long time since we’ve talked Fibonaccis—not surprising considering the market soared 25% in five months and retracement levels are normally a topic during market retreats). The next support level is near 4,800, where there is confluence. “It was the prior all-time high from 2023 and it represents the 38% Fibonnaci Retracement level,” Peterson said. He added there’s been technical damage done to the NDX, which dropped through its 50-day simple moving average (SMA) on Monday, with the Russell 2000® (RUT) and $DJI looking the worst technically among the majors. Those two are furthest away from their respective 50-day SMAs.

Calendar

April 18: March Existing Home Sales, March Leading Economic Indicators, and expected earnings from Alaska Air (ALK), Marsh McLennan (MMC), and Netflix (NFLX).

April 19: Expected earnings from American Express (AXP), SLB (SLB), and Procter & Gamble (PG).

April 22: Expected earnings from Verizon (VZ) and Nucor (NUE).

April 23: March New Home Sales and expected earnings from Freeport-McMoRan (FCX), Halliburton (HAL), Lockheed Martin (LMT), Kimberly-Clark (KMB), PepsiCo (PEP), Philip Morris (PM), Tesla (TSLA), Texas Instruments (TXN), and Visa (V).

April 24: March durable goods orders, and expected earnings from Meta Platforms (META), AT&T (T), Ford (F), Boeing (BA), IBM (IBM), Humana (HUM), and Waste Management (WM).