Stocks Rise in Volatile Session as Investors Await Earnings Bonanza

American politics these days more closely resembles a reality TV show than the democratic process of a constitutional republic. Financial corruption, spy scandals, stock-crushing tweets, tit-for-tat tariffs, White House firings, congressional shout-fests, porn star confessions… you name it, this non-stop circus has it.

But Wall Street today changed the channel. The preferred programming: first-quarter corporate operating results.

Upbeat earnings expectations helped drive markets higher Monday. An impetus for earnings optimism is the new tax bill’s lower corporate tax rate, which should boost bottom lines. The main indices rose today after posting steep losses on Friday.

However, gains were pared in the final minutes of trading as reports surfaced that the FBI had raided the office of Trump’s personal lawyer, Michael Cohen. The records were related to Cohen’s $130,000 payment to adult film actress Stormy Daniels, as well as emails, business documents and tax records. It was yet another example of how “headline risk” can suddenly spoil the party.

That said, the easing of trade fears today helped stocks close in the green. Chinese state media on Sunday urged corporate America to mount concerted opposition to President Trump’s plans for an additional $100 billion in tariffs against Chinese goods. GOP lawmakers in red states also are pressuring the president to back away from his tariffs.

Trump seemed to have gotten the message, for now at least. The president tweeted on Sunday: “President Xi and I will always be friends, no matter what happens with our dispute on trade.” Wall Street’s anxieties were assuaged.

The Great Wall of Denial…

Don’t kid yourself, though. Trade war tensions won’t go away anytime soon. Neither will headline risk.

The markets have been steeply rising and falling based not on fundamental facts about trade, such as actual negotiations, but on angry taunts from both sides. That puts investors in a precarious spot. Stocks are an impulsive tweet away from another meltdown.

Also keep in mind, China’s response to Trump’s tweet was negative. The Middle Kingdom asserted that the U.S. has created a toxic atmosphere that makes accommodation “impossible.” It would be foolhardy of investors to expect President Xi to back down.

Stocks now face a major test: first-quarter earnings results, which start to pour in this week. Expectations are very high, which could pose a Catch-22. If earnings from sector stalwarts are healthy but still don’t live up to lofty projections, stocks could tumble.

On the earnings calendar this week:

Thursday: BlackRock (NYSE: BLK), Commerce Bancshares (NSDQ: CBSH), and Delta Air Lines (NYSE: DAL). Friday: Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), PNC Financial Services Group (NYSE: PNC), and Wells Fargo (NYSE: WFC).

Friday will prove a crucial day that could set a lasting tone for the market. If the money center banks falter, the financial services sector would likely fall and drag down the broader indices. BlackRock owns the popular iShares family of exchange-traded funds (ETFs). As such, BLK is a fund industry bellwether.

According to the latest data (as of April 6) from research firm FactSet, the estimated earnings growth rate for the S&P 500 in the first quarter is 17.1%. If that pace actually materializes for the quarter, it will mark the highest earnings growth since the first quarter of 2011, when it came in at 19.5%.

Another source of optimism on Wall Street is growth in the U.S. and around the world. The analyst consensus is that U.S. gross domestic product for full-year 2018 will rise to 3.0%, after a pace of 2.3% in 2017. Key economic reports to watch this week:

Wednesday: Consumer Price Index (CPI) and MBA Mortgage Applications. Thursday: Chain Store Sales and Jobless Claims. Friday: Job Openings and Consumer Sentiment.

You should pay particularly close attention to the latest CPI data. If inflation appears to be stirring, it could prompt the Federal Reserve to more aggressively hike interest rates. Worry over rising rates has been another factor fueling market volatility.

The labor market is the object of great expectations, too. Analysts expect March to be the 90th straight month that the economy has added jobs.

White House officials softened their rhetoric toward China today, but trade remains a dangerous wild card. Investors still can’t figure out Trump’s real intentions on international trade. The administration sends contradictory signals on a nearly daily basis. Are we witnessing tough-minded posturing or just plain incoherence?

One thing is certain: We’re facing a high-stakes week. Less-than-stellar data on earnings, the economy or jobs could trigger negative overreactions from investors. To be sure, there’s still enough good news to keep you in the market. But amid all of these theatrics, stay cautious.

Monday Market Wrap

  • DJIA: +0.19% or +46.34 points to close at 23,979.10
  • S&P 500: +0.33% or +8.69 points to close at 2,613.16
  • Nasdaq: +0.51% or +35.23 points to close at 6,950.34

Monday’s Big Gainers

  • AveXis (NSDQ: AVXS) +81.57%

Gene therapy firm targeted for takeover by Novartis (NYSE: NVS).

  • Turtle Beach (NSDQ: HEAR) +28.52%

Headset maker posts strong earnings.

  • Leucadia National (NYSE: LUK) +11.53%

Investment holding firm sheds most non-financial assets.

Monday’s Big Decliners

  • Menlo Therapeutics (NSDQ: MNLO) -76.80%

Biotech’s lead drug candidate flunks clinical trial.

  • ACADIA Pharmaceuticals (NSDQ: ACAD) -23.36%

Biotech’s drug linked to patient deaths.

  • Mechel (NYSE: MTL) -20.89%

Russian mining firm’s operating results disappoint.

Letters to the Editor

“IPOs are heating up this year among technology firms. What’s your take?” — Denise J.

You should beware of small companies that become instant Wall Street darlings by making flashy consumer gadgets. Unless the company has a deep bench of unique products, the fad often fades and the stock burns overly hopeful investors.

Another reason for caution is the Facebook (NSDQ: FB) data privacy scandal. Facebook CEO Mark Zuckerberg testifies before Congress on April 10-11. The tech sector will remain volatile, as lawmakers debate ways to tighten data protections for consumers.

All five “FAANG” stocks rose today, on upbeat earnings expectations. The benchmark Technology Select Sector SPDR Fund (XLK) climbed 0.77%. Tech stocks were much higher earlier in the day, though, until the FBI story broke. At one point in the session, the Nasdaq was up by 2%.

Questions about earnings season? Drop me a line:

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.