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More Earnings Fun Ahead, But Market Still Buzzing Over Taxes, D.C. Policy

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April 27, 2017

(Thursday Market Open) Earnings news dominates as a veritable stew of major firms serve up quarterly results. But policy issues, including buzz about the Trump tax plan, remain locked in the headlines.

President Trump’s tax plan and his agreement to stay in the North American Free Trade Agreement (NAFTA), with some caveats, threaten to steal some of the earnings thunder. And one thing very few seem to be talking about is the fact that without some sort of agreement between Congress and the White House, the entire U.S. government could shut down in just over 36 hours. If that happens, it could send the markets a negative symbol regarding Washington’s seeming inability to get things accomplished.

Futures trading pointed to a slightly higher open as big names reporting this morning include Ford (F), Under Armour (UA), PayPal (PYPL), Bristol Myers Squibb (BMY), American Airlines (AAL), and AbbVie (ABBV). This afternoon brings a triumvirate of Amazon (AMZN), Alphabet (GOOG), and Microsoft (MSFT). Keep an eye on AMZN to see what it says about consumer demand following somewhat disappointing results from eBay (EBAY).

About one-third of S&P 500 companies have reported so far, and 64% have beaten Wall Street analysts’ expectations on the top line while 78% have beaten bottom-line estimates, according to research firm CFRA. The firm now projects an 11.1% gain in Q1 earnings overall, with gains for seven of the 11 sectors.

Aside from earnings, there’s oil to consider. Prices fell below $49 a barrel in the early going, despite a drop last week in U.S. stockpiles. Rising gasoline supplies appeared to be the culprit. While that might be tough for energy sector stocks, the recent slide in gas prices could help fuel other industries, especially the transports, by lowering the cost of business.

Stocks leveled off a little late Wednesday after the administration introduced its tax plan. The market’s reaction wasn’t too bad, and that could be seen as a victory. The president didn’t spell out a ton of information, and the devil’s in the details, as the old saying goes. But simplification of tax brackets, lower corporate taxes, and repatriation of foreign earnings were all part of the mix, which could be viewed as positive. Now the political maneuvering is likely to begin.

Bond prices rallied Wednesday, sending 10-year yields back to 2.31%. That’s where they rested early Thursday. Remember, the stock market and benchmark yields have had big rallies over the last week, so it’s not unusual to see a small retreat. The S&P 500 (SPX) index came close to its record intraday high of 2400 on Wednesday, and Nasdaq and the Russell 2000 both set new records, so the stock market is still sky high. It could be interesting to see if the SPX tests that 2400 record from early March in trading today.

Overseas, the Bank of Japan kept interest rates unchanged, as analysts had expected. And on the data front, durable goods orders rose 0.7% in March, compared with the 1.2% increase expected by Wall Street analysts.

Excitement ahead of the tax plan helped fuel Monday and Tuesday’s huge gains, but now that’s in the rear-view mirror. So the market might need another catalyst to go any higher. Those earnings after the close from AMZN, GOOG, and MSFT could help set the tone for next 24 hours. Starbucks (SBUX) also reports this afternoon, so perhaps it’s a good day to sip a “venti” and watch the numbers roll in.

Russell 2000

FIGURE 1: SMALL STOCKS, BIG GAINS

The Russell 2000 (RUT), tracked through Wednesday on the thinkorswim® platform from TD Ameritrade, made new record highs even as the S&P 500 (SPX), represented by the purple line, flattened. Small stocks may have gotten some help from the Trump tax plan, as some analysts said smaller companies may have more to gain from the changes proposed. Data source: FTSE Russell, Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.    

Home Run: All the recent strong data on housing hasn’t gone unnoticed by housing sector-related stocks. It could be interesting to watch earnings from some of those names to see if the strength in housing had an effect on their Q1 results. However, some home-building and construction company stocks took a hit earlier this week after the Trump administration announced tariffs on Canada softwood lumber imports. The concern is that could raise input costs for these firms, and the question is whether this could eventually have a broader negative impact on new home building in general. Stay tuned.

On Call for Q1 GDP: The ultimate “hard data” point is arguably gross domestic product, since that takes into account all kinds of factors across the entire economy. Friday morning brings the government’s first estimate for Q1 GDP, and Wall Street analysts’ consensus is for a rather tepid 1.1%, according to Briefing.com. That’s down from 2.1% in Q4 and from 3.5% in Q3. It would also be the worst quarterly reading since a 0.8% in Q1 2016. Soft business spending may have helped account for the slide in Q4 compared with Q3, Briefing.com said, but factors such as relatively weak retail sales and auto sales might play into the Q1 estimate.

Spare a Dollar? The U.S. dollar index, which might be expected to get a boost from a tax plan designed to re-charge the economy, rose just a little on Wednesday and remains well below recent highs. It’s spent a lot of time under the psychological 100 level recently, but hasn’t been below 98 since November, so that may be a support point to watch.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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JJ Kinahan

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