Stocks Rise on High Hopes for Corporate Report Cards

One afternoon when I was in the fourth grade, I brought home a report card that I thought was pretty darn good. “I deserve a bigger allowance!” I proclaimed to my mother. But her face fell when she read my grades. “From the way you’re bragging, I expected more As,” she said. With a shake of her head, she returned to her ironing.

That’s a true tale from the Sixties suburbia of my youth. I was stung, but I learned a lifelong lesson. It’s important to manage expectations.

Which brings me to earnings season.

Expectations are high for first-quarter earnings results. Companies that only bring home “good” report cards could get punished for not posting superlative grades.

The main stock indices rose today, as worries about trade and Syria faded. Investors are counting on earnings to offset headline risks. This week, 60 S&P 500 companies, including seven Dow 30 components, are scheduled to report first-quarter results.

This morning before the market opened, Bank of America (NYSE: BAC) reported that earnings per share (EPS) jumped 51% to 62 cents. Bank of America’s bottom line benefited from an expanding loan portfolio and higher interest rates. However, global trading revenue fell. BAC shares wobbled from red to green today before edging up a mere 0.47%.

Last Friday, major banks saw their shares swoon as analysts found fault with ostensibly strong operating results. JPMorgan Chase (NYSE: JPM) on Friday posted big increases on the top and bottom lines and yet shares slumped.

Sure, this dynamic is counter-intuitive, but that’s what happens when excessive hope collides with reality.

Analysts expect a blended first-quarter earnings growth rate for the S&P 500 of 17.3%, which would mark the fastest rate of growth since 2011.

Stocks face many uncertainties, including trade war, inflation and rising interest rates. President Trump today accused China and Russia of playing a currency-devaluation “game,” another reminder that headline risk is alive and well.

Kabuki theater…

Trade negotiations right now resemble Kabuki theater, the stylized Japanese drama in which performers sing and dance in elaborate make-up. Despite tit-for-tat bombast from the involved parties, trade deals can’t be renegotiated in a hurry. Existing arrangements took years to put together.

The U.S., Mexico and Canada this week are trying to expedite talks over the North American Free Trade Agreement (NAFTA), but impediments remain. The Trump administration is making tough demands, such as mandating a higher amount of U.S.-made content in products that qualify for NAFTA.

Trump also said the U.S. might re-join the Trans Pacific Partnership (TPP), an Asia-Pacific trade deal his administration abandoned last year. However, without providing details, the White House insists that TPP offer “substantially better” terms.

As long as trade issues remain unresolved, stocks are vulnerable. Another risk is oversupply in the energy patch. Oil prices have steadily risen this year, but their continued momentum is in doubt. Goldman Sachs (NYSE: GS) warned in a recent research note: “Investors remain unconvinced U.S. producer discipline will hold.”

In other words, shale frackers in areas such as the prolific Permian Basin are on track to creating another over-supply, which would crash the price of crude again (see chart).

Falling crude prices would weigh on the broader stock market. The U.S. benchmark West Texas Intermediate fell 1.51% today to close at $66.37 per barrel.

Investors expect corporate earnings to stabilize the volatility that bedevils equities.

Below are major operating results scheduled for this week. I compare the consensus of analysts for this year’s first-quarter EPS results, with actual results from the same quarter a year ago. Most of these firms are expected to exceed prior-year performance:

Tuesday: Goldman Sachs, $5.57 expected, versus $5.15 a year ago; Johnson & Johnson (NYSE: JNJ), $2.00 vs $1.83; UnitedHealth (NYSE: UNH), $2.91 vs $2.37; CSX (NSDQ: CSX), 66 cents vs 61 cents; IBM (NYSE: IBM), $2.42 vs $2.38.

Wednesday: Abbott Labs (NYSE: ABT), 58 cents vs 48 cents; Morgan Stanley (NYSE: MS), $1.25 vs $1.00; Textron (NYSE: TXT), 48 cents vs 46 cents; U.S. Bancorp (NYSE: USB), 95 cents vs 82 cents; Alcoa (NYSE: AA), 63 cents vs 63 cents; American Express (NYSE: AXP), $1.71 vs $1.34; Canadian Pacific Railway (NYSE: CP), $2.69 vs $2.50; Kinder Morgan (NYSE: KMI), 21 cents vs 17 cents.

Thursday: ABB (NYSE: ABB), 32 cents vs 28 cents; BNY Mellon (NYSE: BK), 96 cents vs 80 cents; Novartis (NYSE: NVS), $1.27 vs $1.13; Nucor (NYSE: NUE), $1.10 vs $1.11; Pentair (NYSE: PNR), 83 cents vs 65 cents; Philip Morris International (NYSE: PM), 88 cents vs 98 cents; PPG Industries (NYSE: PPG), $1.40 vs $1.35; Sunoco Products (NYSE: SON), 72 cents vs 59 cents; Taiwan Semiconductor Manufacturing (NYSE: TSM), $3.48 vs $3.38.

Friday: General Electric (NYSE: GE), 11 cents vs 21 cents; Honeywell International (NYSE: HON), $1.90 vs $1.66; Procter & Gamble (NYSE: PG), 99 cents vs 96 cents; Schlumberger (NYSE: SLB), 37 cents vs 25 cents; Stanley Black & Decker (NYSE: SWK), $1.36 vs $1.29; SunTrust Banks (NYSE: STI), $1.10 vs 91 cents; Waste Management (NYSE: WM), 83 cents vs 66 cents.

All 11 S&P 500 sectors are expected to report earnings growth for the second straight quarter. But as corporate report cards come in, woe betide those firms with only passing grades.

Monday Market Wrap

  • DJIA +0.87% or +212.90 points to close at 24,573.04
  • S&P 500 +0.81% or +21.54 points to close at 2,677.84
  • Nasdaq: +0.70% or +49.63 points to close at 7,156.28

Monday’s Big Gainers

  • BlueLinx Holdings (NYSE: BXC) +7.71%

Building products distributor merges with peer.

  • CellCom Israel (NYSE: CEL) +6.86%

Analysts bullish on wireless provider.

  • VMWare (NYSE: VMW) +5.35%

Cloud provider eyes strategic deals.

Monday’s Big Decliners

  • Celldex Therapeutics (NSDQ: CLDX) -64.60%

Biotech’s drug study fails.

  • Acacia Communications (NSDQ: ACIA) -35.97%

U.S. bans telecom component maker from selling to China.

  • Oclaro (NSDQ: OCLR) -15.18%

Analysts sour on telecom equipment maker’s merger.

Letters to the Editor

“Is lithium a good investment play?” — Mark S.

Lithium is a lightweight metal that’s used to create heat-resistant glass, ceramics and lubricants. Lithium also is used in industrial applications, such as steel production.

The biggest growth driver for lithium is demand for lithium ion batteries used in electric vehicles. Large-cap lithium miners are your best plays.

Got questions about breakthrough technologies? Drop me a line:

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