Earnings Regain Driver’s Seat, Power Stocks Higher
Concerns about Syria, trade war, White House scandals, inflation, and rising interest rates all got left at the side of the road today. Quarterly earnings grabbed the wheel and drove stocks sharply higher.
The analyst consensus is that first-quarter earnings of the S&P 500 will post year-over-year growth of 17.3%. Robust earnings from Netflix (NSDQ: NFLX), Goldman Sachs (NYSE: GS), Johnson & Johnson (NYSE: JNJ), and UnitedHealth (NYSE: UNH) lifted optimism today over what is projected to be the strongest earnings season since 2011.
And yet, in a dynamic I’ve recently warned you about, some firms saw a decline in their share prices today even after posting robust earnings. Stocks are priced to perfection and investors are easily disappointed. As a whole, though, stocks racked up a stellar day.
After the closing bell on Monday, streaming video giant Netflix posted first-quarter earnings per share (EPS) of 64 cents, in line with consensus expectations. Revenue came in at $3.7 billion, beating expectations of $3.69 billion. Total streaming subscribers (net adds) reached 7.41 million, blowing away expectations of 6.5 million. NFLX shares today soared 9.19%.
Before the market opened on Tuesday, a trio of industry bellwethers reported operating results that beat expectations on the top and bottom lines.
Investment bank Goldman Sachs posted EPS of $6.95 compared to expectations of $5.58. Revenue came in at $10.04 billion, versus expectations of $8.74 billion. But GS shares today fell 1.68%, after it announced that it would cease share buybacks in the second quarter.
Diversified health services giant Johnson & Johnson reported EPS of $2.06 versus $2.02 expected and revenue of $20 billion versus $19.46 billion expected. Sure enough, though, JNJ shares fell 0.93% due to a dip in net income.
UnitedHealth, the largest health insurer in the U.S., reported EPS of $3.04, compared to expectations of $2.89, and revenue of $55.19 billion versus expectations of $54.86 billion. UNH rose 3.57%.
The results from Netflix were especially encouraging, in the wake of data privacy scandals that have shaken the technology sector. Netflix has long been the object of great expectations and the concern was whether the FAANG member could hit its numbers.
Netflix came through with flying colors, lending momentum to its Silicon Valley peers. The five FAANG stocks have taken a beating in recent weeks, but today they all rose. The benchmark Technology Select Sector SPDR Fund (XLK) posted a gain of 1.87%.
Trade tensions linger…
Trade tensions haven’t magically disappeared. Trump’s economic nationalism has resulted in his administration’s withdrawal from trade pacts and international treaties, a trend that worries global investors. The tit-for-tat between the U.S. and China continued today.
China’s Commerce Ministry announced Tuesday that customs officers will charge a fee of 179% on U.S. sorghum imports after a probe by officials found the shipments were unfairly subsidized and hurting Chinese producers of the essential grain.
Sorghum is used to feed livestock and distill a liquor that’s popular with Chinese drinkers. China is the largest buyer of American sorghum products, to the tune of $960 million in 2017.
Meanwhile, the U.S. banned American firms from selling parts and software to China’s ZTE (OTC: ZTCOF) for seven years, a devastating blow for the telecom equipment maker and its content providers. U.S. officials charge that ZTE had illegally shipped telecom equipment to Iran and North Korea.
But today trade tensions were superseded by earnings results. Sanguine economic data further fueled optimism.
The U.S. Commerce Department reported Tuesday that housing starts rose 1.9% in March to a seasonally adjusted annual rate of 1.319 million units. Economists had forecast housing starts rising to a pace of 1.262 million units last month. Permits for future home building rose 2.5% to a rate of 1.354 million units in March.
Demand for housing is buttressed by a healthy labor market. Unemployment is low and wage growth is rising, which gives consumers greater wherewithal to take out mortgages.
The recent confluence of positive economic and employment data, however, has spawned a phenomenon that’s been rare in recent years: rising inflation.
The rekindling of inflation could give the Federal Reserve a reason to hike interest rates four times this year instead of the originally planned three. Indeed, strong corporate earnings are on a collision course with higher interest rates both from the Fed and in the Treasury market.
Another warning sign is that investors are starting to view tax-related earnings expansion as inferior to organic earnings growth. Wall Street is coming to the conclusion — rightfully so, in my opinion — that the corporate tax cut is akin to a “sugar high” for stocks. How corporate America spends this windfall will help determine the direction of stocks in 2018.
Tuesday Market Wrap
- DJIA: +0.87% or +213.59 points to close at 24,786.63
- S&P 500: +1.07% +28.55 points to close at 2,706.39
- Nasdaq: +1.74% or +124.81 points to close at 7,281.10
Tuesday’s Big Gainers
- Calyxt (NSDQ: CLXT) +20.86%
Food producer gets favorable FDA ruling.
- Twitter (NYSE: TWTR) +11.37%
Tech stocks rebound in wake of NFLX earnings.
- J.Jill (NYSE: JILL) +8.67%
Retailer faces bright 2018 outlook.
Tuesday’s Big Decliners
- Apellis Pharmaceuticals (NSDQ: APLS) -16.60%
Analysts turn negative on biotech’s stock offering.
- Bellicum Pharmaceuticals (NSDQ: BLCM) -12.60%
Wall Street gives thumbs down to biotech’s public stock offering.
- SeaChange International (NSDQ: SEAC) -7.17%
Video tech provider disappoints on earnings.
Letters to the Editor
“Aren’t the Trump administration’s energy policies bad for solar power stocks?” — Allison B.
The solar industry is increasingly immune from policy changes. Solar energy customers have grown dependent on inexpensive, reliable power from the sun and see no reason to switch, regardless of government assistance, new tariffs or the price of oil.
The cost of photovoltaic cells continues plunging and solar energy’s infrastructure is entrenched, pervasive and efficient.
In addition, European countries such as Germany and major developing countries such as China are devoting significant resources to renewable energy, solar in particular. Solar stocks are tapped into an unstoppable trend.
Got questions about technology stocks? Send me an email: email@example.com
John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.