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Citigroup And Goldman Sachs Kick Things Off With Mixed Results


Everybody loves a good comeback story, as golf fans might tell you following Tiger Woods’ unexpected victory at the Masters over the weekend. The markets have also staged quite a comeback since the end of 2018, and there was more evidence of that Friday when the S&P 500 Index closed above 2900 for the first time since last fall.

The S&P 500 is now up more than 23% from its Dec. 24 low as earnings season begins, and JP Morgan got things off pretty nicely on Friday. Now it’s time for more big banks to report, and the first one Monday, from Goldman Sachs, looks like it might be a bit of a puzzle.

Fresh Bank Earnings To Ponder

As detective Sherlock Holmes once said, “Well, Watson, what do you make of it?” Investors might be asking themselves the same question this morning after a first glance at Goldman Sachs’ earnings as another huge week of quarterly big bank reporting begins.

Goldman Sachs took care of business on the earnings side of the equation in Q1, easily surpassing third-party consensus estimates with a $5.71 earnings per share reading. The average analyst projection was $4.96.

However, revenue of $8.81 billion came in under third-party consensus of $9.07. The lower than expected top line appeared to reflect weaker trading activity in the quarter, something many analysts had predicted going into bank earnings due in part to low volatility in the markets and investor shyness after stocks cratered in December.

Fixed income trading revenue fell 11% to $1.84 billion, and stock-trading revenue tumbled 24% to $1.77 billion. There’s no way to get around it. These just aren’t very good numbers, though they weren’t surprising considering they came in near analyst estimates. The question is whether investors might discount some of the bad news in Q1 as a short-term obstacle that might be a one and done issue as the year rolls on.

With Goldman Sachs, you don’t like to see them miss on revenue, but management of expenses was so good it might have helped them manage the overall 18% trading revenue drop. The issue now is how do they continue to make things balance. Will trading revenue be able to come back enough? You can’t just cut and cut and cut. Goldman Sachs shares rolled back and forth between a bit higher and a bit lower in pre-market trading right after the report.

The other big bank this morning is Citigroup, which also posted better than expected earnings per share at $1.87 vs. third-party consensus of $1.80. Revenue of $18.6 billion came in just a little under analysts’ expectations. Fixed income trading came in above where Wall Street had been looking, but equities trading slumped. Remember, some of the banks might have gotten a lift earlier in Q1 from the Fed’s December interest rate hike, something that became apparent Friday with earnings from JPMorgan Chase.

Citigroup also appeared to do a good job managing expenses, and if you were bullish about the banks Friday it doesn’t look like Monday’s results would be likely to change things too much. The market doesn’t seem to have too much direction early on as many investors continue struggling to interpret the two big reports this morning.

The puzzle so far with bank earnings, despite Friday’s JP Morgan-assisted rally, is that you could make arguments either way about the quality so far. Wells Fargo, for instance, beat earnings expectations but saw shares get hit Friday due in part to disappointing guidance about the bank’s net interest income outlook. Citigroup and Goldman Sachs didn’t really have the flags waving in one direction or the other.

Earnings Helped Provide Friday’s Tailwind

After a rough start, the old week ended on a very strong note with the S&P 500 Index finishing above 2900 for the first time in six months. The all-time high close is around 2930, so we’re getting pretty near.

The Dow Jones Industrial Average had an even better day than the S&P on Friday, due in part to the performance of two of its components: Walt Disney  and JP Morgan. The strength in JP Morgan was likely a function of earnings, as the company kicked off earnings season by topping the Street’s expectations on both top- and bottom-lines. Also, it’s possible that positive comments about the economy from JP Morgan Chairman and CEO Jamie Dimon might have added to the general good feelings across sectors Friday.

Disney was arguably one of the “happiest places” to be on Wall Street Friday as the stock catapulted to better than 11% gains after the company announced a streaming service offering lower prices than Netflix. Perhaps proving Newton’s Third Law of Motion that every action has an equal and opposite reaction, shares of Netflix fell nearly 4.5% (see more on Disney and Netflix below). Friday’s double-digit gains brought DIS to a new all-time high, and it’s not often that one sees a Dow stock rise more than 11% in a single session.

It was one of those days that showed how the Dow can get easily influenced by just a couple of names, rising 1% while the S&P rose just a shade more than 0.6%. Still, both indices ended higher for the week. The S&P 500 is up three weeks in a row going into the new week, and crude oil prices registered their sixth-straight week of gains. Volatility, meanwhile, continued to descend, as the Cboe Volatility Index ended the week just above 12. That’s down from 17 just a few weeks ago and well below the historical average of around 15.

Yields March Higher

As the Cboe Volatility Index dug a deeper hole, Treasury yields climbed. The slide below 2.4% in the 10-year yield earlier this year and the yield curve inversion seem like faraway memories now, with the 10-year yield back above 2.55%. That’s still below where they were at the start of 2019, but the push above what some analysts saw as key resistance at 2.55% might help set a more positive tone for the week ahead. Falling yields earlier this year had caused some hand-wringing about a possible recession. Now we’re starting to see U.S. economic growth estimates turn higher.

Speaking of higher, some analysts are now looking at the two bank earnings Friday—JPM and Wells Fargo—and wondering if current Q1 S&P 500 earnings estimates might be a bit too negative. One thing to consider is that it’s still very early to be talking about this. Another week or two of earnings from across multiple industries might help clarify whether the average analyst estimate for a low-to-mid single-digit year-over-year earnings decline is still in the cards.

However, one thing we might have learned Friday was that it’s easy to live in the moment and overlook something that happened a while back. JP Morgan’s quarter, in particular, appeared to benefit from the Fed’s late December rate hike, and that’s something many people didn’t really factor in. The biggest surprise in JP Morgan was trading revenue not being as bad as many had thought, but in a way JP Morgan had a big first-mover advantage. Now the onus might be on Goldman Sachs and Morgan Stanley to show that they, too, had good trading quarters.

From a sector standpoint, the week ended with cyclical stocks ahead of the game. Industrials, Financials, and Communication Services were some of the biggest gainers, while Health Care and Staples stayed in the rear. This is often the kind of market action one sees when investors feel positive about the economy. This week brings some more economic news, including China’s Q1 economic growth, U.S. March retail sales, U.S. March housing starts and building permits, and U.S. March industrial production (see more below). We’ll also have the Fed’s Beige Book for April, which is a summary of business activity across Federal Reserve member banks.

Also remember that this is a shortened week, with U.S. markets closed Friday for the Good Friday holiday. That could potentially cause some heightened volatility Thursday ahead of the long weekend.

Figure 1: OUT OF SYNC: After moving closely together much of last year, 10-year Treasury yields (candlestick) and the S&P 500 Index (purple line) have gone different directions so far in 2019. Although yields are starting to gain some ground over the last week or two, they still remain down for the year even as stocks continue moving rapidly higher. The question is whether this dichotomy can continue. Data Sources: Cboe, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Data Sources: Cboe, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade.

Don’t Forget Big Blue: Amid the slew of bank earnings early this week, it might be easy to forget it’s not all about the Financial sector early in earnings season. For instance, most investors are probably aware that FAANG member Netflix is due to report tomorrow, but so are Johnson & Johnson and CSX, along with United Continental and IBM. Between these four, investors might get a really good sense of trends in health care, consumer goods, air travel, transport, and to some extent, Info Tech.

Of all these earnings reports, IBM might be among the most interesting. The company delivered strong Q4 earnings and issued robust guidance the last time it reported, back in January. Revenue, however, declined year-over-year. Consider watching results from IBM’s Technology Services and Cloud Platforms segment, which posted nearly $9 billion in Q4 revenue but just missed analysts’ expectations. It might also be worth checking in to see if IBM has any updates on its acquisition of software firm Red Hat.

Soft Industrial Production Mulled Ahead of Data: Tomorrow brings the latest monthly industrial production data from the Fed, and it follows three consecutive months of weak performance for this key metric. Last time out, in February, industrial production rose just 0.1%, and it fell in January. Softness in durable goods manufacturing was the story earlier this year, and that could reflect falling demand from both businesses and consumers for some of the bigger ticket items like machinery and major appliances. Manufacturing output fell 0.4% in February, while utilities output was the report’s only real strong point.

One question heading into the March report tomorrow is whether the Fed’s decision to keep interest rates low might have increased demand from where it was in January and February, when the Fed had just raised rates for the fourth time in a year. Another question might be whether higher commodity costs are playing a role in current softness. Crude has been on a tear most of the year, and some of the industrial metals like copper have been climbing again, too.

Greenspan Delivers Note of Caution: Former Fed Chairman Alan Greenspan made some bearish comments on CNBC early Friday, saying growing U.S. deficits and the rising cost of entitlements pose dangers in the future. He’s also worried about inflation. His remarks didn’t seem to hurt markets too much Friday, but they could help serve as a reminder that the markets are reaching historic highs now and prudence is never a bad idea. With the S&P only about 1% away from its all-time high close, it might not be the best time for investors to go “all-in.” Also, with the old quarter done, now could be a good time to consider looking at your performance and seeing if Q1’s big stock market rally has your portfolio more weighted to stocks than you originally intended. Greenspan long ago warned about the danger of “irrational exuberance,” and while the markets and economy do appear healthy, his words still have meaning for investors who might be getting carried away by this fierce rally.

TD Ameritrade® commentary for educational purposes only. Member SIPC.


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Strong Results From Big Banks Kick Off Earnings Season


Earnings season started with a bang early Friday as two major U.S. banks shared Q1 results and the market reacted positively. Big beats from JPMorgan Chase and Wells Fargo really help set a positive tone for earnings overall.

JPMorgan Chase earned $2.65 a share in the first quarter, easily beating third-party consensus estimates of $2.35. Revenue—which many analysts had expected to decline—rose 5% to $29.9 billion as the company appeared to benefit from higher interest rates and strength in consumer banking. Shares rose more than 2.5% in pre-market trading.

JPMorgan Chase’s Chairman and CEO Jamie Dimon, who swings a lot of influence around Wall Street, gave a sunny report on the U.S. economy in the earnings release, saying, “Even amid some global geopolitical uncertainty, the U.S. economy continues to grow, employment and wages are going up, inflation is moderate, financial markets are healthy and consumer and business confidence remains strong.”

Sometimes we live too much in the moment. Let’s not forget that the Fed did raise rates back in December, and JPMorgan Chase was a beneficiary of that the first few weeks of the quarter. That might help explain why things don’t look as bad from a net-interest standpoint as some conceivably expected.

One thing that stood out in the earnings report—and could help paint a reassuring picture of the economy—was JPMorgan Chase’s credit card business, where sales volume rose 10% and merchant processing volume climbed 13%. This might work against concerns about consumer health after some less than impressive retail sales reports so far this year. The company said “consumer spending remains robust.”

On a less positive note, JPMorgan Chase reported lower equity and fixed income trading in Q1. This wasn’t unexpected, considering the relative lack of market volatility in early 2019. However, trading revenue didn’t come in as poorly as some analysts had expected, and that might raise expectations next week, particularly for Morgan Stanley but also for Goldman Sachs.

Wells Fargo was the other big bank reporting early Friday, and its results also topped third-party consensus. Earnings per share of $1.20 beat the average estimate of $1.10, while revenue of $21.6 billion out-performed the average estimate of $20.99 billion. Shares climbed about 2% right after the company released results.

In its press release, Wells Fargo cited “strong credit performance and high levels of liquidity,” though revenue did fall year-over-year. Mortgage banking income rose sharply from Q4, and it could be interesting to hear any potential observations on the housing market from company executives if they address that in their call. Wells Fargo has a huge presence in the mortgage business.

There was also some merger and acquisition news in the Energy sector early Friday, as Chevron said it plans to buy Anadarko Petroleum for $33 billion in cash and stock. There’s been a bit of an uptick in M&A activity recently, and this looks like a pretty big one.

Watch What We Say

Earnings season has began in kind of unusual circumstances. Typically, going into the first days of earnings, people tend to be on edge wondering what kind of numbers they’ll hear from the previous quarter. This time around, however, most market participants and analysts seem to already be expecting  relatively weak Q1 performance, and it’s all about what’s next. You don’t normally see this.

In other words, guidance and executive language could have a bigger impact than what the numbers say.  Judgment starts today with the bank earnings calls, and continues next week when four more key big banks report. Bank of America, Citigroup, Goldman Sachs and Morgan Stanley are all set to share their numbers by Wednesday.

Going into earnings season, the market appears to have priced in things getting better later this year, but there’s an appetite out there to hear this from the executives themselves.

Arguably, not many executives have as big a bullhorn as Jamie Dimon of JP Morgan Chase, who presides over his company’s earnings call this morning. Dimon has the potential to conceivably move the market with his statements, and what he says might be more important than in many other quarters because many people want his view of where he sees the economy going.

It’s also kind of surprising that so far this year, we haven’t really heard CEOs speak up too much about the tariff situation. That’s something they might need to start addressing, and it could be worth listening for, especially from Financial firms but also from CEOs of Industrial, Materials and Info Tech companies whose businesses are potentially going to be affected by trade battles with China.

Another thing to consider is any perspective CEOS have on Europe’s soft economy and how that might play out for U.S. companies. If you look at the European Central Bank’s (ECB) statement from its meeting this week, it sounded pretty ugly. The Fed minutes, on the other hand, had a much more moderate “wait and see” kind of tone.

Can’t Meet Low Expectations? Expect Ramifications

Though the emphasis might be on guidance and executive statements, also consider keeping something else in mind: Even though expectations are relatively low across most sectors, companies that can’t hit those low expectations might risk getting punched harder than usual. Companies that do meet the tepid expectations aren’t likely to get much reward. Companies that meet or exceed expectations and combine that with a positive forecast for the rest of 2019 are the ones that might stand to benefit the most.

For the record, FactSet pegs S&P 500 earnings to fall 4.2% in Q1, the first year-over-year quarterly earnings decline since Q2 2016.

While today marks the start of earnings season across all S&P 500 sectors, the earnings attention this time around is primarily likely to focus on Financials and Info Tech. There’s an old market saying that you can’t have a big rally without Financials, but so far this year that’s happened. Financials trail the S&P 500 by quite a bit, though they are up moderately year-to-date. JPMorgan Chase’s trading numbers for Q1 are likely to get a close eye ahead of next week, when other investment banks report. Morgan Stanley has kind of taken the mantle on trading, so JPMorgan Chase’s numbers might help foreshadow what people expect for Morgan Stanley, especially on bond trading.

Info Tech, meanwhile, has been a leading sector all year, and earnings season means those companies will step to the plate and help set expectations for the coming months. There’s a lot of optimism in the sector, judging from its 23% gains year-to-date, so the question going into earnings might be whether that optimism was justified.

Market Malaise

Speaking of sector performance, the market seemed to remain in the same sort of malaise it’s been in for a couple weeks on Thursday as investors might have been squaring positions ahead of earnings. Volume stayed pretty low, as it has been for a while.

The S&P 500 had a very rare unchanged close, though it remains near recent highs just below 2890. There’s been no real concerted attempt this week to test 2900, a potential sign that investors might be waiting for earnings to be the catalyst that sends markets one way or the other.

Sector leaders on Thursday included Financials and Utilities, while laggards included Health Care—which got hit hard—along with Materials and Real Estate. Health Care has been among the weakest-performing sectors over the last three months, which some analysts say might reflect political pressure on the industry to lower prices. Health insurers were some of the sector’s worst performers Thursday.

Though earnings are today’s big story, some data are also on the plate. University of Michigan sentiment for early April is due shortly after the open, and the Briefing.com consensus is 97.6, down slightly from the last reading of 98.4 but still well above the January and February lows.

Key data due next week include March retail sales, March industrial production, and March housing starts and building permits.

Figure 1: A TALE OF TWO SECTORS: Since the start of the year, Health Care (candlestick) is the worst performing S&P 500 sector, hurt by worries about potential legislation designed to push down prices. Info Tech (purple line) is the leading sector year-to-date. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade.

Key Data From China Next Week: There’s some important economic data winging its way across the Pacific next Tuesday. That’s the day China is scheduled to release its year-over-year Q1 gross domestic product (GDP) growth, a data point that’s come increasingly in focus for the U.S. market over the last few years as China’s huge economy exerts more influence on U.S. companies. In Q4, China’s GDP growth was 6.4%, while full-year 2018 GDP growth totaled 6.6%, the lowest in 28 years. For Q1, analyst consensus is around 6.3%, according to TradingEconomics, a company that monitors international economic data.

Investors might want to consider keeping a close eye on the numbers under the headline, too, particularly industrial production for Q1. That number came in at 5.7% in Q4—above analyst expectations—while third-party consensus for Q1 industrial production growth stands at 5.8%. If that number comes in low, it could put another cloud over hopes for China’s economic resurgence. Some of the U.S. sectors with heavy exposure to China include Info Tech, Industrials, and Materials.

Speaking of GDP: Don’t get too excited, but Q1 U.S. gross domestic product (GDP) estimates are perking up a little. Last month, some analysts started looking for lower than 2% GDP growth in Q1, which would have been a pretty dramatic downturn from total 2018 growth of 2.9%. As of Thursday, the Fed’s GDPNow indicator projects 2.3% growth in Q1, which isn’t anything really outstanding but certainly sounds better than some of the earlier estimates that were out there. The estimate rose from the previous 2.1% due to recent manufacturing data, the Atlanta Fed said. The government’s first Q1 GDP estimate is due April 26.

Yields At Bay Despite Data: So far, this week’s somewhat higher than expected inflation data for March hasn’t apparently had much impact on Treasuries. Yields only moved a smidgen up the ladder early Thursday after the 0.6% rise in March producer prices, and the 10-year yield stayed just under 2.5%. That’s basically the level it’s pivoted around for a while, with some analysts seeing key technical resistance around 2.55%. Meanwhile, that inversion between three-month and 10-year yields that drew so much attention last month has stayed at bay so far in April, with the 10-year yield trading about six basis points above the three-month Thursday. The 10-year yield also has a comfortable 14-basis-point premium to the two-year yield, and those two didn’t invert in March, though they came close. Any soft economic data, whether from the U.S., Europe, or China, conceivably has the potential to put more pressure on the curve, which in turn might help re-ignite fears about the economy here.

TD Ameritrade® commentary for educational purposes only. Member SIPC.


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