If it seems as if we’ve been talking about trade tension between the U.S. and China all year, it’s because we have. And I expect “trade fears” and its accompanying “headline risk” to continue for the foreseeable future. But is that enough to sell out of equities, especially as strong Q2 earnings are set for release?
Effective midnight Friday, $34 billion of Chinese imports were officially hit with tariffs as promised by the Trump administration. China, as also promised, implemented tariffs on the same value in U.S. goods. The question investors must now reconcile is, “what does all of this mean for my portfolio?”
"Tariffs not only hurt our farmers, ranchers and airplane manufacturers, but they also harm every American consumer,” said Senator Jerry Moran, who represents the agriculture-heavy state of Kansas. “We should be working with our allies to isolate China rather than escalate a trade war.”
Despite China’s retaliation Friday, U.S. stocks closed higher Friday as all three major indexes posted gains for the second straight session. Investors overlooked the ongoing trade rhetoric and welcomed the strong jobs report. Not only did the U.S. create 213,000 new jobs in June, topping the 200,000 jobs analysts had modeled for, readings for both May and April were revised higher.
For the week, the Dow Jones Industrial Average added 0.8%, closing Friday at 24,456.48, while the S&P 500 index gained 23.21 points or 1.5% to 2,759.82. The Nasdaq Composite Index was the big winner, adding 2.4% to 7,688.39. And this goes back to what I’ve always said: The prospects of strong revenue and profits by U.S. companies can (and should) abate the risk of a trade war between the world’s two largest economies.
In that vein, while trade tensions may have invited tons of anxiety, it’s worth pointing out that the U.S. trade deficit saw a decline, falling 6.6% in May to a 19-month low. Regardless of where one might stand on the topic of trade, objectively, this is nonetheless a positive indicator — particularly as the Q2 earnings season approaches.
All told, the economy continues to strengthen at a time when the jobs market is picking up momentum. Add in the muted inflation environment and we have the perfect recipe for better-than-expected Q2 results from some of the nation’s largest financial institutions. Here are the stock’s to keep an eye on this week.
PepsiCo (PEP) - Reports before the open, Tuesday, July 10
Wall Street expects PepsiCo to earn $1.52 per share on revenue of $16.08 billion, compared to the year-ago quarter of $1.50 per share on $15.71 billion in revenue.
What to Watch: The beverage and snack giant has beaten Wall Street’s earnings estimates in nine consecutive quarters. But achieving this feat hasn’t been easy. In the first quarter, despite a 3-cent beat, Pepsi’s bottom line was adversely affected by higher costs and a rise in interest expenses. The company has been working hard to improve its competitive position against rival Coca-Cola (KO) through timely product launches and aggressive marketing, which resulted in higher cost of sales increased SG&A (selling, general, and administrative) expenses.
Citigroup (C) - Reports before the open, Friday, July 13
Wall Street expects Citigroup to earn $1.57 per share on revenue of $18.5 billion. This compares to the year-ago quarter when earnings came to $1.28 per share on revenue of $17.9 billion.
What to Watch: Last month Citigroup said announced plans to refund $335 million to a group of customers it believes may have overpaid interest on credit card loans. In a settlement with the Consumer Financial Protection Bureau, Citi will refund 1.75 million customers in overpaid interest by the end of the year. The bank’s retail lending grew 6.0% to $147.0 billion in the first quarter, while the bank’s average card loans in Q1 also grew 6.0% to $159.0 billion. While the $335 million settlement could adversely impact 2018 earnings, the retail business is expected to remain strong, thanks to lower unemployment and consumer confidence.
JPMorgan Chase (JPM) - Reports before the open, Friday, July 13
Wall Street expects JPMorgan to earn $2.22 per share on revenue of $27.37 billion. This compares to the year-ago quarter when earnings came to $1.82 per share on revenue of $25.76 billion.
What to Watch: Does JPMorgan have (or should have) any interest in acquiring Deutsche Bank (DB)? Shares of the troubled German bank rose as much as 6% Friday on reports by a German magazine that JPMorgan, along with Industrial and Commercial Bank of China could buy a stake in Deutsche Bank. Although a JPMorgan spokesperson quickly shot down the rumor I expect JPMorgan management — on the conference call with analysts — will likely answer questions about the idea. Elsewhere, analysts on Friday will also focus on sustained improvements in key areas of business, namely the credit business, rising net interest margins and stable net-charge-off rates.
Wells Fargo (WFC) - Reports before the open, Friday, July 13
Wall Street expects Wells Fargo to earn $1.13 per share on revenue of $21.71 billion. This compares to the year-ago quarter when earnings came to $1.07 per share on revenue of $22.17 billion.
What to Watch: Wells Fargo still has a long way to go to earn Wall Street’s trust, but the troubled bank still has a strong underlying business, which new management has stabilized. The bank’s aggressive cost-cutting has Wells Fargo on track to achieve its earnings targets over the next two years. What’s more, the fact that Well Fargo received Fed approval for a stock buyback authorization of $24.5 billion (larger than JPMorgan’s $20.7 billion and Bank of America’s (BAC) $20.6 billion) suggests a greater deal of confidence from regulators than investors are willing to provide.