"Don't fight the Fed" has become a Wall Street mantra over the past few years. In his book "Winning on Wall Street," which was published in 1970, Marty Zweig coined the term. And investors who have adopted this maxim into their trading strategies have done well.
But with the markets at all-time highs heading into second quarter earnings, how much runway is left for stocks to keep climbing given the expected pullback in earnings? Does it matter? Conventional wisdom suggests that when the central bank is cutting rates, stocks will climb. This is because a drop in rates augurs well for equities since borrowing costs, which can be a major expense, decline, which boosts profits.
In other words, although earnings for Q2 are projected to decline, if not remain tepid for the rest of the year, the outlook for the next 12 to 18 months will nonetheless improve thanks to monetary easing. The market loves a dovish Fed. And Fed Chair Jerome Powell’s testimony this week, during which he confirmed what we already assumed, which is that a 25 basis-point cut will occur at the end of the month. The market responded accordingly Friday.
On Friday stocks rose to all-time highs, completing a record-setting week. The Dow Jones Industrial Average surged 243.95 points, or 0.9%, to close at 27,332.03. The S&P 500 rose 0.5% to end the day at 3,013.77. Notably, this was the index’s first close above 3,000, while the tech-heavy Nasdaq Composite advanced 0.6% to close at 8,244.14. All the major indexes achieved multiple milestones, including the Dow closing above 27,000 for the first time on Thursday. For the week, the Dow rose 1.5%, while the S&P 500 added 0.8% and the Nasdaq ended up 1%.
That said, this coming week, investors will get a better sense of where CEOs feel about business conditions, their willingness to make corporate investments and how they will guide for the rest of the year. Not fighting the Fed has worked. While that might be too simplistic, it’s not the only game in town. Combined with strong metrics on U.S. unemployment, a confident consumers and positive comments on prospects for a U.S.-China trade deal, stocks are poised for more gains. Here are names to keep an eye on.
JPMorgan Chase (JPM) - Reports before the open, Tuesday, Jul 16
Wall Street expects JPMorgan to earn $2.50 per share on revenue of $28.91 billion. This compares to the year-ago quarter when earnings came to $2.29 per share on revenue of $28.39 billion.
What to watch: Commercial bank stocks have not performed as well as prior estimates suggested, given that the Fed has adopted a new stance on monetary policy. JPM stock, meanwhile, has been one of the better performers, rising 18% year to date. The bank’s consistent execution, along with its plans to take on the discount brokers with its new commission-free arrangement has been applauded. On Tuesday analyst will focus on the bank’s guidance amid the low-interest rate environment to gauge the extent to which JPMorgan can to deliver growth this year and beyond.
Wells Fargo (WFC) - Reports before the open, Tuesday, Jul 16
Wall Street expects Wells Fargo to earn $1.15 per share on revenue of $20.94 billion. This compares to the year-ago quarter when earnings came to 98 cents per share on revenue of $21.55 billion.
What to watch: Who will be the bank’s next CEO? Reports suggest that Cathy Bessant, a veteran of rival Bank of America (BAC), is in talks to take on the new role. Former Wells CEO Tim Sloan stepped down abruptly in late March, having served in that role since October 2016. Bessant is BofA's chief operations and technology officer, serving in that role since 2015. Is she the right fit? Her first task will be to move the bank beyond its various scandals surrounding improper business practices and set a new tone towards growth and stability. In that regard, Wells Fargo still has a long way to go to earn Wall Street’s trust, but the troubled bank, which still has a strong underlying business, could be a turnaround play for the next 12 to 18 months.
Johnson & Johnson (JNJ) - Reports before the open, Tuesday, Jul 16
Wall Street expects JNJ to earn $2.43 per share on revenue of $20.29 billion. This compares to the year-ago quarter when earnings came to $2.10 per share on revenue of $20.83 billion.
What to watch: Shares of the healthcare giant closed down more than 4% on Friday after Bloomberg reported that the U.S. Department of Justice has launched an investigation on the company to determine whether the company lied about possible cancer risks from its talcum powder. This news couldn’t have come at a worst time as the company heads into its earnings results on Tuesday. Johnson & Johnson has been plagued by headline risk, starting with last year’s plaintiffs victory, awarding a $4.69 billion over claims that the products caused ovarian cancer. On Tuesday the company the company’s top- and bottom-line results will take a back seat to what it says about any potential outcome and/or settlement that can remove these uncertainties.
Netflix (NFLX) - Reports after the close, Wednesday, Jul 17
Wall Street expects Netflix to earn 56 cents per share on revenue of $4.93 billion. This compares to the year-ago quarter when earning were 85 cents per share on $3.91 billion in revenue.
What to watch: Netflix stock has been consolidating between $333 and $380 or so for the past year. While the stock is up nicely by 40% year to date, the shares are down 6% in the trailing twelve months. The movie streaming giant is facing stiffer competition not just from the existing players such as Amazon and Hulu, but now the recent unveiling of Disney’s streaming platform, which has caused investors to re-evaluate Netflix’s long-term growth potential. While analysts remain positive that Netflix’s first-mover advantage won’t disrupt its growth story (the stock has a consensus Buy rating), the company on Wednesday must to its part to affirm this confidence by delivering not only strong subscriber additions for both domestic and international markets, but also upbeat guidance.
Microsoft (MSFT) - Reports after the close, Thursday, July 18
Wall Street expects Microsoft to earn $1.21 per share on revenue of $32.75 billion. This compares to the year-ago quarter when earning were $1.13 per share on $30.09 billion in revenue.
What to watch: The strength of Microsoft’s Commercial Cloud business has been, and will continue to be, the catalyst for the stock’s strong return in 2019 (up 37%, while trading at 52-week highs), besting the 20% rise in the S&P 500 index. What the software giant forecasts for its cloud service Azure will be the key factor in determining whether the Microsoft maintains its leading trillion-dollar market cap after its earnings report. In Q3 Azure revenue surged 73%, keeping its status as the company’s fastest-growing segment. Maintaining that rate of growth will be a tall order, however. On Thursday investors will want some evidence that Azure can continue to chip away at Amazon (AMZN) lead in the public cloud market.