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Earnings Parade Underway: Netflix and More Big Banks To Start Busy Week

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October 16, 2017

(Monday Pre-Market) Big banks kicked off reporting season last week, but a bunch of other sectors get their turns at bat starting in coming days. Info tech, health care, consumer, and industrial firms — along with a couple more key banks — form a powerful lineup of sluggers as earnings roll on.

Housing data for September also come into view over the next few days, along with industrial production and the Fed’s Beige Book. Additionally, investors might be tuned into Washington, D.C., for any potential developments on tax reform or health policy as the week continues.

First things first: Earnings. The week begins with Netflix (NFLX) after the close Monday. While most of the major “FANG” firms —which constitute Facebook (FB), Amazon (AMZN), NFLX, and Alphabet (GOOG) — report a little later in the quarter, NFLX gets the tech spotlight in the days ahead. Its shares have been up substantially over the last quarter and recently hit $200 for the first time amid some bullish analyst expectations about possible subscriber growth. We’ll likely get a better view on Monday afternoon.

Another sector in focus this week is health care, with both Johnson & Johnson (JNJ) and United Health (UNH) scheduled to post their results before the open Tuesday and Abbott (ABT) scheduled before the open Wednesday. The health care sector has lagged the broader market over the past month, in part due to many investors seemingly embracing more aggressive market components like info tech, energy, and financials, but also perhaps because of uncertainty about the U.S. health insurance situation going forward. President Trump’s decision last week to scrap government subsidies to insurance companies for low-income Americans is the latest question mark, and health care stocks fell Friday after the news.

Other key earnings reports in the days ahead include IBM (IBM) after the close Tuesday, eBay (EBAY) after the close Wednesday, Verizon (VZ) and Philip Morris (PM) before the open Thursday, and General Electric (GE), Honeywell (HON), and Procter & Gamble (PG) before the open Friday. And those are just a scattering of all the names reporting, though the heart of earnings season arguably doesn’t start until later this month.

Did you think we were leaving out banks? Well, that’s not the case. Both Morgan Stanley (MS) and Goldman Sachs (GS) wrap up the big bank results when they issue earnings Tuesday morning. So far, with four banks under its belt, the market response has been rather sluggish. Three of the four big banks reporting last week saw their shares fall immediately after results hit the wire, and the financial sector as a whole slipped about 0.75% over the five sessions through midday Friday. However, the sector rose around 7% in the month heading into earnings, so it could be a “buy the rumor, sell the fact” situation shaping up here.

It’s arguable that expectations of a Fed rate hike by the end of the year — seen by midday Friday as an 82% probability according to CME Group Fed funds futures — might have already given the financial sector a boost, and perhaps more positive catalysts could be needed for the sector to keep climbing. While the bank earnings we saw last week generally beat expectations (see below), they weren’t out of this world amazing, either.

Speaking of the Fed, investors might want to keep on their toes in coming days for more Fed speeches. Notably, Fed Chair Janet Yellen is scheduled to speak Friday night at the National Economists Club, addressing the topic, “Monetary Policy Since the Financial Crisis.” While that’s after trading ends for the week, it’s worth taking some time to monitor. Yellen has strongly defended the Fed’s post-recession policies, so it seems unlikely she’d depart from that. However, it’s always possible she could comment on the current economy. 

One thing Yellen and other Fed officials have talked about a lot lately is inflation, and investors got a mixed picture last week as core producer prices climbed more than expected while core consumer prices came in below expectations (see below). That means the Fed’s inflation conundrum persists. On the other hand, it seems likely that consumers feel healthier, based on Friday’s retail sales data for September. Those rose 1%, even after stripping out the volatile auto sector. Building materials and e-retailing saw solid gains during the month.

Watch earnings from American Express (AXP) next Wednesday morning, eBay (EBAY) after the close Wednesday, and PayPal (PYPL) after the close Thursday — as well as PM early Thursday and PG early Friday — for potentially more insight into recent consumer behavior. 

Looking away from the earnings and Fed picture for a minute, crude oil could also be a factor in coming days. Crude rallied sharply Friday morning amid media reports of improved Chinese demand and President Trump’s decision not to certify Iran’s compliance with the U.S./Iran nuclear deal. The question is whether oil can gain some footing above the $50 a barrel level and advance from there, something it’s had trouble doing so far this year.

Major Indices

FIGURE 1: DJIA RISES ABOVE.

Though all three of the major indices were solidly higher over the last month through midday Friday, the Dow Jones Industrial Average ($DJI), represented by the blue line in the chart above, is outpacing both the S&P 500 (SPX), represented by the bars, and the Nasdaq (COMP), seen as the purple line. That might reflect the bigger weighting of financials and industrials in the DJIA vs. the SPX, as those have been leading sectors over the last few weeks. Data source: Standard & Poor’s, Dow Jones, Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

European Pressure: Weak bond yields overseas might be keeping the brake on U.S. bond yields. The benchmark German bund fell to a three-week low of 0.4%, early Friday, and that correlated with a rather steep one-day slide in U.S. 10-year Treasury yields to 2.28%. Though the U.S. Fed is “unwinding” its balance sheet, the European Central Bank (ECB) keeps buying more bonds, potentially keeping a firm lid on U.S. yields.

Meanwhile, Eurozone inflation was unchanged on a monthly basis in September and up 1.5% from a year ago, below the ECB’s 2% target. That wouldn’t appear to give the ECB much reason to take its foot off the gas, though one month’s data doesn’t necessarily represent a trend. The ECB meets again on Oct. 26, so listen for any hints then about next steps the bank might plan. There were media reports Friday that the ECB might be considering a pullback on bond purchases starting early next year.

Producer Prices Outgaining Consumer Prices: Consumer prices looked rather tame in September, according to the government’s Consumer Price Index (CPI) released early Friday. From a core perspective, prices rose just 1.7% year-over-year, the same as the previous four months. However, core producer prices released the day before showed a 2.2% year-over-year gain. A big question is when and if higher producer prices might translate to higher consumer prices. Up until now, that hasn’t been the case, if CPI is any guide. It looks like wholesalers don’t seem to be passing along costs to the consumer. Still, keep an eye on margins this earnings season to see if some companies are starting to feel any impact from wholesale inflation slightly outpacing consumer inflation. Companies that make processed goods saw a large jump in wholesale prices last month.

Four Banks in the Book: With earnings from four of the biggest banks now in the books, the market reaction has been rather tepid. Of the four, three saw their stocks fall after releasing earnings. That’s despite there being a lot to like, especially from Bank of America (BAC), JP Morgan (JPM), and Citigroup (C). Even though there was a lot of focus on trading losses during Q3, that was pretty much as expected considering the lack of volatility plaguing the markets all year. While Wells Fargo (WFC) came up a bit short on the revenue line, the rest of the banks topped Wall Street analysts’ estimates for earnings and revenue. Additionally, we saw some good things in consumer banking, with JPM and BAC reporting solid progress in that area. There was good growth in loans from JPM, BAC, and C. The strength on the consumer side and growth in loans both potentially send bright tidings about economic growth.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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