The market is being pulled in two directions today. News on the trade front looks better, but Facebook’s weak quarterly performance seems likely to weigh on tech and possibly Nasdaq in general. Amazon reports after close.
(Thursday Market Open) As the tech sector licks its wounds from Facebook’s sub-par quarter, the question is whether the contagion might spread. At least early on, it’s impressive how well the rest of the market is hanging in there despite the Facebook news.
It certainly looks like tough sledding for tech after Facebook (FB) disappointed investors and saw shares tumble more than 20% in post-market trading. However, signs of a thaw in the U.S./Europe trade relationship might help balance the load for the broader market, and a host of earnings reports might divert attention, too.
Those tidings from FB could mean pressure today not only on FB shares, but potentially on shares of the other “FAANG” stocks including Amazon (AMZN), which is due to report after the close. Most of the FAANGs fell in apparent sympathy with FB after the close yesterday.
However, keep in mind that FB’s issues are its own, not necessarily AMZN’s or Alphabet’s (GOOG, GOOGL). In fact, AMZN is more of a retail stock now than a tech, even though it does tend to often move with the other FAANGs. Watch out for charges of guilt by association today. Remember, too, that when Netflix (NFLX) issued disappointing results last week, it didn’t seem to have much impact beyond that one name.
Shares of FB plummeted more than 20% at one point after FB missed not only on the top line, but also on other metrics and company guidance. Earnings of $1.74 came in a couple cents above consensus estimates, but revenue of $13.23 billion fell short. Perhaps more significantly, the number of daily active users (DAUs)—an industry standard for user activity—came in flat for the North America region and lower in Europe, partially as a result of new data regulations.
On the conference call, FB executives said the company expects, for the next two quarters, a revenue decline “as much as the high single digits." On the call, Chief Financial Officer David Wehner also reiterated the company would be focusing on data security and data privacy, which is “going to have some impact on revenue growth." Recall, in April of this year, company CEO Mark Zuckerberg appeared before Congress to address questions on data privacy. Some analysts point to a fall in DAUs as evidence the company may have a hard time hitting revenue targets while also keeping user data on lockdown. Others, however, see it as a temporary setback as the company retools and responds to new realities of data protection.
Before FB posted its disappointing numbers, things looked pretty good Wednesday. The session started with worries about trade dominating after General Motors (GM) cited rising costs in its earnings press release. That turned some investors’ minds toward tariffs. However, that issue got a new spin after news that President Trump and European Commission President Jean-Claude Juncker had agreed to work toward eliminating tariffs and barriers on trade.
The two sides, Juncker said according to The New York Times, agreed to hold off on further tariffs and work toward dropping existing ones on steel and aluminum. They tried to hammer out a deal to eliminate tariffs, non-tariff barriers, and subsidies on industrial goods, excluding autos. The market’s rally accelerated after the meeting.
While there’s more work to do, any positive news on trade might help ease what’s arguably been one of the primary barriers to the market re-testing its highs from nearly six months ago. In fact, today’s the six-month anniversary of the S&P 500’s (SPX) all-time high of 2872 posted Jan. 26. Wednesday’s close of 2846 was the highest since Jan. 29, putting the index only about 1% away from posting another all-time high.
Before pulling out the party favors, however, remember what happened earlier this year when the administration announced that the trade war with China was “on hold.” That didn’t last, as both countries subsequently slapped tariffs on one another.
From a data standpoint, today’s durable goods report for June takes the spotlight. Durable orders including transportation rose just 1% in June, coming in below Wall Street analysts’ expectations for 3.2%. Not including transportation, they rose 0.4%, in line with forecasts.
Tomorrow, investors get a look at the government’s first estimate for Q2 gross domestic product (GDP) growth. The average Wall Street estimate is 4.1%, according to Briefing.com, up from 2% in Q1. The Atlanta Fed’s GDP Now forecast is even higher at 4.5%. It’s been four years since the U.S. economy last had 4% or better quarterly growth.
Key earnings besides AMZN today include Starbucks (SBUX), Allergan (AGN), McDonald’s (MCD), Amgen (AMGN), and Intel (INTC).
Overseas, the European Central Bank (ECB) decided Thursday to keep rates unchanged. The ECB’s quantitative easing program is on track to begin pulling back later this year and end by December. As always, take a listen to ECB President Mario Draghi, who speaks this morning, for any possible interesting spin on the situation.
Ten-year yields turned a little higher early Thursday, rising above 2.96%. That could give financials a chance to maybe show some strength.
FIGURE 1: $100 Billion Dive: Here’s what it looks like when a stock sheds more than $100 billion in market value over just a couple hours. The stock, of course, was Facebook (FB) after it reported earnings late Wednesday. Data Source: Nasdaq. Chart Source: The thinkorswim platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Amazon Earnings in the Cart This Afternoon: AMZN is the big one to watch after today’s close. It’s expected to report adjusted EPS of $2.49 on revenue of $53.27 billion, according to third-party consensus analyst estimates. The company has beat earnings estimates by a wide margin in the past three quarters. Even though Prime Day technically fell in Q3, management might still provide some additional commentary on results on the earnings call. The 36-hour shopping event got off to a rocky start with some glitches, which the company was able to resolve.
Looking for Bargains? One thing to think about with the SPX nearing its all-time highs is price-to-earnings (P/E) ratios. Both the trailing and forward-looking P/E ratios for the SPX are above their 10-year averages, FactSet notes. The forward 12-month P/E of 16.5 is above the 10-year average of 14.4, and the trailing one-year P/E is 21.7, above the 17.2 average. Still, neither of those looks like enough to set off any major alarm bells. Strong earnings in the first half of the year might be keeping the ratios from really taking off even as the market climbs. However, FB’s big descent late Wednesday might have some investors worrying again about stocks with particularly high P/E ratios, many of which reside in the Nasdaq and the tech sector.
Roll Out the Barrels: Well, the slight rise in U.S. oil inventories earlier this month didn’t last. Stockpiles fell more than 6 million barrels last week to the lowest level in several years, the Energy Information Administration (EIA) reported Wednesday, helping give U.S. crude oil futures a slight lift. This tends to be peak use time in the U.S., so a drop in supplies isn’t too surprising. However, the draw in gasoline supplies did slow a bit from the previous week. Oil has been trading in a pretty tight range for a while now, pulled back and forth amid possible supply disruptions from Venezuela and Iran but also by record U.S. production, which hit 11 million barrels a day this month for the first time ever. Crude dropped a tad early Thursday.
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