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Earnings Barrage, Part Two: Another 130 Firms on Deck Ahead of Critical July Jobs Data

In addition to earnings, investors will be focused on any news from Washington that has to do with the next round of stimulus. Another piece of information expected today is ISM manufacturing data.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Caution: Return of volatility
5 min read
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Key Takeaways

  • Another busy earnings week ahead with Disney, Uber, Beyond Meat

  • Jobs report this coming Friday dominates the data picture 

  • Keep an eye out for possible profit-taking after big FAANG rally last Friday

Editor’s note: JJ Kinahan, Chief Market Strategist at TD Ameritrade, is out of the office this week.

(Monday Market Open) Last week was the busiest earnings stretch of the season, and now the fun continues with another packed schedule featuring more than 130 companies. The question is whether big-Tech can almost single handedly keep the train running. 

Early Monday, the answer seemed affirmative as Apple (AAPL) continued to propel Tech ahead of the opening bell. AAPL is up more than 1% at a new all-time high in pre-market trading. Other Tech shares and the broader market might be getting a tailwind.

Some influential reports expected this week include Moderna (MRNA), Wynn Resorts (WYNN), Clorox (CLX), Take-Two (TTWO), Walt Disney (DIS), CVS Health (CVS), Beyond Meat (BYND), Roku (ROKU), Uber (UBER), and Square (SQ). 

Though the earnings storm is a bit lighter than a week ago, data continue to reign. Maybe none more than this Friday’s July payrolls report, especially after a troubling rise in initial jobless claims the last two weeks. Some had hoped jobless claims could start easing in July, but we’re seeing the opposite.

Way before the monumental jobs report, we get a fresh reading on the Purchasing Managers’ Index (PMI) from the Institute for Supply Management (ISM) later this morning. It came in at a pretty solid 52.6% in June, with above-50 indicating expansion. New orders and production were both very strong last time out, so we’ll see if that continued. 

Eyes also turn to Washington today, where Congress and the White House ended the weekend still deadlocked on a new stimulus (see more below). The longer it takes for something to get done, the more danger this could pose to the market. 

Consider taking the crude watch this week, too. It slipped below $40 intraday late last week and barely held $40 an hour before Monday’s open. Any signs of crude falling below $40 and staying there a while could be a good barometer for possible economic softness ahead. 

Does Friday’s Late Rally Pose Profit-Taking Danger Today?

By midday Friday, the long rally appeared to be losing steam in a post-FAANG, end-of-the-month profit-taking spree. A few hours later, as the old week ended, that theory kind of went up in smoke. The market rebounded very nicely, helped by AAPL’s early gains accelerating. Shares of AAPL ended up rising more than 10% as pundits oohed and ahhed over its Q2 performance.

One theory now is that Friday’s late AAPL-led upswing in the market represented “window dressing” as July closed. That’s a term to describe the ancient practice of fund managers snapping up shares of “winning” stocks as a month ends so clients will see the flashy names included in their month-end reports. If that actually happened late Friday, it could mean profit-taking got postponed until today, so consider looking out. 

Friday’s early action—which saw major indices roll back despite blowout quarters from the four “FAANGs” that reported late Thursday—suggests that the FAANGs by themselves might not be enough to power everything else higher. The FAANGs and their cousins—the semiconductors and Microsoft (MSFT)—compose more than 25% of the SPX by market cap, and are up sharply this year. The rest of the SPX? Not so much (see more below). 

When the market fails to rally hard despite strong earnings data, that can signal exhaustion. Same with the SPX’s failure to show much enthusiasm about testing the old highs from February above 3300. It’s up about 1% year-to-date, which is pretty amazing when you consider all that’s happened. Still, the SPX range has tightened a lot lately (see chart). 

Another possible caution flag was the SPX’s failure Friday to close above the July intraday high near 3280. That said, it’s hard to stay too negative when you consider July was the fourth straight month of SPX gains, and earnings so far this quarter have generally been better than expected despite mostly being way worse than a year ago. The SPX rose a solid 5% in July, while the Nasdaq (COMP) climbed 6%. 

Tech continues to do well, but Financials keep struggling because they’re so tied to rates. We’ve been so driven by Tech in this recovery that if you take the top-five mega-caps out of the equation, it’s hard to see where we’d turn next. On the other hand, it was good to see UPS (UPS) perform nicely on earnings and in the market last week. When package delivery companies do well, that arguably says good things about the health of the consumer.

Earnings Wrap: When Negative-35% Sounds Good

Looking more closely at earnings through the end of last week, 63% of S&P 500 companies have now reported results, and 84% of those firms reported earnings per share above the five-year average, according to research firm FactSet. Info Tech and Health Care are some of the best earnings performers so far, with Industrials and Energy bringing up the rear. 

The average earnings beat so far is more than 21% above estimates. Info Tech is the leading sector for positive earnings surprises, with 86% of Tech firms reporting better-than-expected results. It feels like analysts really under-estimated the ability of those companies to deal with pandemic-related economic stress. 

Still, FactSet sees average Q2 SPX earnings down 35.7% from a year ago. That’s not great by any stretch of the imagination but beats the firm’s week-ago estimate of a negative 42.4% earnings quarter.

Sales are also coming in above expectations, with 69% of companies beating Wall Street so far on that metric. This could mean analysts underestimated the support from monetary and fiscal stimulus in Q2, which raises worries about whether Q3 can get the same kind of consumer input when the next round of fiscal funding remains in doubt (see more below).

CHART OF THE DAY: HOLDING PATTERN. For the last few weeks, futures on the S&P 500 Index (/ES) have stayed in a pretty tight range—roughly between 3190 and 3285—as market headwinds and a stalled stimulus package have more or less offset positive news on the earnings front. But this week starts with /ES bumping against the top of that range. Data source: CME Group. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

State of the Stimulus: The weekend came and went with no deal on any extension of coronavirus-related $600 unemployment checks, and the debate is expected to continue this week. The expiration of those checks Friday coincided with a Wall Street Journal report that household spending appeared to pull back in recent weeks after rising 5.6% in June. As the WSJ noted, “Household spending reflects two-thirds of economic demand in the U.S. Americans’ spending will help determine the economy’s path in the coming weeks and months. A sharp drop in spending—tied to business closures and fears of the virus—was the biggest reason the U.S. economy contracted at a record rate in Q2.” 

If Congress finds a way to get the checks flowing again, would it be soon enough to prevent consumers from pulling back more? It depends. States could quickly resume sending out the extra $600, the WSJ said, citing state labor officials. But the officials indicated it may take days or weeks to even lower the flat payment to $200 a week (as some in Congress want), and possibly months to calculate benefits as a percentage of a worker’s previous income. So if Congress approves some sort of aid, that isn’t necessarily going to provide immediate relief to consumers. We’ll have to watch closely this week to see where it goes. If things get completely called off, the market might react poorly. 

Apple Goes Four-For-One: Apple’s (AAPL) surprise four-for-one stock split announced last week generally got a positive read from analysts, some of whom said it could potentially bring more investors into the stock and increase liquidity in the shares, which would likely mean less volatility. However, the split probably doesn’t affect the general outlook for AAPL or the fundamental picture. 

You just don’t see these kinds of stock splits as often lately, although AAPL did a seven-for-one split a few years ago. Stock splitting used to be relatively common, but now it feels like companies are a lot more comfortable with four-figure stock prices. 

Some analysts wondered whether AAPL decided on this because it was by far the highest-priced stock on the Dow Jones Industrial Average ($DJI), a price-weighted index. No one knows for sure if that’s why AAPL made the move. It could be simply to draw more investors, some of whom might have started to struggle coming up with $375 for a single share. Whatever the reason, one published report noted that the pace of DJIA gains may slow slightly when AAPL goes from being first in price to 16th among $DJI stocks. On Friday AAPL’s huge price probably kept the $DJI a lot, but the same thing won’t necessarily happen after the end of this month when it splits.

Rally Caps and Market Caps: According to Morningstar data, as of Friday’s close, the total market cap for the S&P 500 (SPX) is $25.6 trillion. A quick check of the market caps of the five big-cap Tech/Comms giants MSFT, AAPL, Amazon (AMZN), Alphabet (GOOGL), and Facebook (FB)—which you can access for each stock in the thinkorswim® platform under the Analyze tab > Fundamentals—is $6.7 trillion, or 26%. So these five stocks represent 26% of the SPX market cap. And remember: When counted as a whole, these five are up more than 30% year to date—with AAPL up over 40% and AMZN up 65% as of Friday’s rally—but the SPX is roughly flat on the year.

So if 26% of the market cap is up 30%, but the total index is flat, what does that say about the 495-or-so other stocks that comprise the index? A little back-of-the-napkin algebra says they’d have to be down about 10%.

The big question is when the economy returns to normal growth, could we see investors rotate out of “big tech”and into cyclical stocks that aren’t rallying in tandem with the SPX? It’s too early to tell since we aren’t seeing signs of any rolling over, but it’s something that creates a yellow flag.

All the best,

Shawn

@ShawnCruz_TDA


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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • Another busy earnings week ahead with Disney, Uber, Beyond Meat

  • Jobs report this coming Friday dominates the data picture 

  • Keep an eye out for possible profit-taking after big FAANG rally last Friday

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