First quarter earnings are in full swing, and the message to investors so far is calm down. Despite all the very real risks to global and U.S. growth, corporate America is (to quote a former President) doing fine. Over seventy percent of S&P 500 companies that have reported to date have beaten expectations. Based on that and forecasts for what is to come, earnings overall are expected to decline as compared to the same quarter last year, but by nowhere near as much as had been feared. This week has the potential to change that, but the nature of the high-profile earnings to come makes that unlikely.
Over the next few days, we will see a whole host of earnings in the tech sector and, given that sector’s propensity to lead the market over the last few years, this could well be the week that sets the tone for stocks post earnings season. With one or two notable exceptions, the tech sector’s problems have not been about earnings. Privacy issues and fears about long-term growth potential have caused some concerns since last summer, but earnings have proven to be a bright spot, even for the stocks most affected by those things.
Take Facebook (FB), for example. After a second half of 2018 dominated by scandal and controversy, they showed with their last release that none of that was affecting their capacity to earn when they reported EPS of $2.38, well above consensus estimates. Although growth was an issue for both companies, fellow social media companies Twitter (TWTR) and Snapchat (SNAP) also performed better than expected in Q4 in terms of actual results.
That and other positive results explain in part why tech has led the recovery so far this year, as shown by the chart below for the iShares U.S. Tech ETF (IYW) versus the S&P 500 equivalent (SPY). Even more striking is the outperformance by the “old-tech” giant Microsoft (MSFT), whose stock has soared past previous highs.
All of the companies mentioned above will report this week, along with a couple of other widely followed corporations, Amazon (AMZN) and Tesla (TSLA). Amazon has, over the last four earnings reports, beaten expectations by an average of over 88%. The beats as a percentage of estimates have been falling as Wall Street has caught up with the massive earnings potential of the company, particularly its cloud business, but even so, when a company as focused on growth as Amazon generates massive profits, it boosts the whole market.
Tesla is almost the exact opposite story. Results there have frequently disappointed in the past, but that and some negative news has led to lowered expectations that could be beatable. Even if TSLA’s numbers aren’t great though, there are not really any broader implications of their results, whereas earnings at companies like Microsoft and Amazon reflect overall economic conditions and confidence.
This week’s earnings are not all about tech, but in other sectors as well a return to focus on hard performance rather than potential problems could prove beneficial. That is true in the healthcare sector for example, where all the talk of Medicare for all has weighed heavily. Good results there for a company like Anthem (ANTM), who report on Wednesday, would be welcome in that context. And there are others, such as Boeing (BA) who would probably much rather traders look at what they are doing rather than what may lay ahead.
Typically, earning season is supportive of stocks. Results are measured against expectations and over two-thirds of companies on average record EPS beats each quarter. That obviously provides a boost, but at times like this there is another dynamic that can provide support. Earnings focus traders and investors on the basic function of corporations, making money. There are always reasons to worry about the future, but the realization each quarter that despite that, companies continue to thrive can give the market a welcome boost. On that basis, this could be the week when stocks break finally break above their previous highs.