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Today’s Recipe: Mix Caution And Record Highs As Morgan Stanley Beats, Tech Rolls On

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July 19, 2017

(Wednesday Market Open) It’s strange to talk about caution as the market makes new highs, but that remains the feeling on Wall Street as Wednesday dawns. Both the Nasdaq (COMP) and S&P 500 (SPX) posted new all-time highs yesterday despite bank earnings looking somewhat disappointing.

There’s little direction this morning after an overnight session that was the ultimate in watching beige paint dry, which means all eyes likely turn toward earnings. One final big bank — Morgan Stanley (MS) — took the spotlight early on.

Like other banks, MS didn’t find much luck in the trading business last quarter. However, it made up for that with strong investment banking revenue. The company easily beat Wall Street’s earnings and revenue estimates. Profit of 0.87 cents a share grew from 0.75 cents in the year-ago quarter and beat consensus of 0.76 cents. Revenue of $9.5 billion came in above estimates of $9.1 billion. Investment banking revenue rose 7% from a year ago, while sales and trading revenue slid 3%. 

So the biggest banks are behind us, and leave a mixed legacy for the quarter. It wasn’t surprising to anyone following the markets that trading revenue fell, considering the banks telegraphed that issue, as well as a long period of low volatility. Still, the financial sector continues to face headwinds moving forward unless something changes, so that could take some of the starch out of the market, especially considering financials are traditionally such an important component.

It’s important to keep things in perspective about earnings in general beyond the banks, as United Continental (UAL) reported a strong quarter after the close yesterday and 90% of earnings are yet to come. So far, 9% of S&P 500 companies have reported their second-quarter results. Of those, 74.4% have exceeded earnings and sales estimates, according to Thomson Reuters data.

On the negative side, IBM (IBM) reported another quarter of year-over-year sales declines and is set to open at a nine-month low as the stock continues to flounder.

We often discuss the importance of following the S&P 500 Index (SPX) rather than the Dow Jones Industrial Average ($DJI) for a better flavor of market action, and that advice certainly seemed appropriate Tuesday. The DJIA, with financial companies heavily represented, fell 0.25% even as the much bigger and broader SPX managed to post gains and hit a new record high. And the Nasdaq, helped again by info tech, is on its longest winning streak since 2015 and up nearly 18% so far this year, almost double the gains of the SPX.

While financials sputtered, mark it eight for the info tech sector, which has now risen eight days in a row following Tuesday’s 0.54% gain. Netflix (NFLX) led the day, thanks to a powerful Q2 in which the company added far more new subscribers than expected. Info tech stocks are approaching their year-to-date highs for the sector set in June, and their sagging fortunes of late June and early July seem to have gone by the wayside. Tomorrow’s earnings from Microsoft (MSFT) and eBay (EBAY) represent the next big touch points for the sector. 

Though MS is the last of the big banks to report, the financial sector still has some important earnings releases ahead, including American Express (AXP) this afternoon. Aside from financials, Qualcomm (QCOM) is the other important report to watch after the close. Companies opening their books tomorrow morning include Abbott (ABT) and Philip Morris (PM). Friday’s the big day, with both General Electric (GE) and Honeywell (HON) before the open. There are still some major earnings on the horizon.

Market volatility remained light, dropping below 9.7 by early Wednesday. The possibility of a record low can’t be ruled out, so keep an eye on that. Additionally, housing starts and building permits data came out this morning, giving investors another look into the housing market after yesterday’s data showed mortgage applications on the rise.

Financials

FIGURE 1: YOU GO YOUR WAY...

The financial sector, plotted through Tuesday on the thinkorswim® platform from TD Ameritrade, retreated from its recent rally as banks showed signs of Q2 struggles. Meanwhile, technology (purple line) put in its eighth-consecutive session of gains and is nearing last month’s 2017 highs. Source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Orient Express: Good news winged its way across the Pacific early this week, as China’s retail sales grew 10.4% in the first half of the year, up slightly from 10% in Q1. June retail sales in China grew 11% year over year the best month since December 2015. It’s just one report, but worries about China’s economy might recede a little if we keep getting numbers like these. Additionally, having this positive data as we move into the heart of earnings could sweeten Q2 earnings expectations for some of the big U.S. multi-nationals, including agricultural equipment, energy, info tech, and industrial companies that sell their products in China. However, some analysts say the road might get a little rockier for China’s economy moving forward.

Dollar Struggles Not Necessarily All Bad: As long as we’re talking exports, let’s consider the U.S. dollar, which fell Tuesday to new lows for the year and touched levels last seen in August 2016. The dollar’s recent woes might not have much effect on Q2 earnings, considering the currency spent much of that quarter at higher levels than now. On the other hand, if the dollar keeps getting slammed, maybe it’ll be time to consider whether Q3 earnings might get a boost as U.S. products conceivably could start looking more attractively priced to consumers overseas. It’s way too early to predict, but it’s worth thinking about as the quarter moves forward.

No Legislation; No Problem? The market — including health care stocks — took a turn south early Tuesday when it became apparent that Congress wouldn’t be able to accomplish health reform anytime soon, and many investors started worrying about what that might mean for tax reform and other business-related legislation. While those questions remain, the news coincided with strong earnings results from companies like Johnson & Johnson (JNJ), Lockheed Martin (LMT), and Netflix (NFLX), leading some to wonder how much Wall Street really needs Washington. “Good earnings news overall has provided a very important offset, as it suggests corporate America is managing fine as it is without any newfangled fiscal stimulus,” Briefing.com told readers in a note Tuesday. The caveat, Briefing.com added, is that many stocks are sporting premium valuations based in part on the notion that they’ll achieve even stronger growth from a tax reform plan

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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