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Earnings season peaks next week at a critical time for the market. U.S. equities sold off at almost this exact point of the second-quarter earnings calendar. Trading over the past thirteen months has been choppy. The S&P 500 did touch an all-time high in July, but the current level just above 3,000 is barely 2% above September 2018 peaks.
Despite the relatively stable picture painted by broad indices like the S&P 500 or the Dow Jones Industrial Average, it’s a market where certain groups are making big moves. Notably, there has been a clear correction in high-valuation growth names.
Twitter (NYSE:) fell sharply after its third-quarter earnings report on Thursday. High-flyers like Roku (NASDAQ:) led the market for the first half of the year, yet many have been clipped in recent months. Uber (NYSE:) and Lyft (NASDAQ:) are the highest-profile names among a 2019 IPO class that has mostly disappointed.
The obvious concern is that lower valuations in growth stocks may bleed into the rest of the market. Meanwhile, Q2 saw an and the third quarter may well do the same.
For the market to take new highs, earnings reports next week must be strong. Several of the world’s most valuable companies report. So do a few giants with turnaround hopes. A slew of impressive results next week can inspire confidence and juice the market. Anything less, and the myriad external pressures on U.S. stocks could lead to a repeat of the selloff seen in late July, or the bigger plunge seen in .
Earnings Reports to Watch: AT&T (T)
Source: Lester Balajadia / Shutterstock.com
Earnings Report Date: Monday, October 28, before market open
Third-quarter earnings from AT&T (NYSE:) kick off the week. And it’s quite obviously an important report. T stock has rallied sharply lately, bouncing off a seven-year low reached last year to touch a 20-month high this month. An activist effort from Elliott Management moved the stock higher last month on investor hopes the firm could drive transformative change at the telecommunications giant.
That combination, however, seems to leave T stock in a dangerous position next week. Elliott’s plans make sense on paper. But in practice, AT&T continues to struggle. It has lost market share to rivals in wireless. Directv has become an albatross.
This simply hasn’t been a company that has executed well. AT&T’s report on Monday morning, combined with T-Mobile (NASDAQ:) earnings that afternoon, may well remind investors of that fact. And that could depress some of the optimism that has driven T stock higher in recent months.
As a result, this seems like a quarter where something has to happen. That about a spin-off of Directv. It could be long-awaited signs of life in wireless subscriber adds. Or AT&T can spark optimism about its streaming plans, as Disney (NYSE:) did earlier this year.
The status quo has led T stock mostly sideways for most of this decade. After the recent rally, the status quo won’t be good enough. AT&T needs to deliver an earnings report on Monday morning that can sustain the current optimism.
Alphabet (GOOG) (GOOGL)
Source: Benny Marty / Shutterstock.com
Earnings Report Date: Monday, October 28, after market close
Recent history suggests that Alphabet (NASDAQ:, NASDAQ:GOOGL) is going to make a big move in trading on Tuesday, after its Monday afternoon earnings release. after its first quarter report in April. It soared following a Q2 earnings beat in July.
In both cases, expectations were a factor. GOOG was at an all-time high heading into April’s release. It was bouncing off a five-month low before the Q2 gain (which quickly reversed). That seems to suggest some caution ahead of Monday’s report: Alphabet stock has rallied nicely this month, and at $1,260, GOOG is at resistance that held in both July and September.
Technically and fundamentally, then, Alphabet needs a big quarter. And it may well deliver on that front. Analysts have come out with toward Google Cloud as it tries to compete with Amazon.com (NASDAQ:) and Microsoft (NASDAQ:). There’s no sign yet of a slowdown in the core search advertising business.
That said, I’ve (and admittedly mostly wrong) toward GOOG stock, and, from my standpoint, Monday’s release looks potentially dangerous. Outside of search and cloud, potential drivers like Waymo remain years off. And at these levels, any bit of disappointment could lead to a repeat of the post-Q1 decline.
But if Alphabet can deliver results that convert the skeptics, new all-time highs and a run at a $1 trillion market cap likely would be on the way.
Source: Paul McKinnon / Shutterstock.com
Earnings Report Date: Tuesday, October 29, before market open
Shopify (NYSE:) isn’t the biggest company reporting next week. It isn’t the mostly widely held. But it might well be the most interesting.
Shopify’s valuation has been among the highest in the market among stocks its size: SHOP stock traded at over 30x 2019 sales at highs above $400. A reversal that began in late August took the stock down 25%, and led a broader decline in high-flying names.
Since then, support at $300 has been tested twice. As of this writing Thursday, the stock is up nearly 7% after an analyst upgrade. Clearly, there’s a bit of a tug of war between the obvious opportunity for growth and the enormous valuation (300x 2020 consensus earnings-per-share estimates).
Shopify almost certainly is going to beat Street estimates with its Q3 numbers on Tuesday morning. The company hasn’t missed since going public. In fact, save for the third-quarter report in 2016, it hasn’t even really come close to missing.
So the question is: how does the market react? It seems likely that the reaction to Shopify earnings could set the tone for a stock like ROKU, which fell in tandem with SHOP and who reports the following week. The same goes for the recent batch of IPOs that have seen their own valuations compress.
If SHOP gains after a solid earnings report, support at $300 is confirmed, and so is the market’s willingness to pay up for growth. If a business with this growth opportunity falls after good numbers, however, then investors should be very cautious owning lower-quality growth names with questionable valuations. The obvious problem there is that, from a business standpoint, pretty much all growth stocks are lower-quality relative to Shopify.
General Electric (GE)
Source: Jonathan Weiss / Shutterstock.com
Earnings Report Date: Wednesday, October 30, before market open
As I wrote this week, look key for General Electric (NYSE:). CEO Lawrence Culp inspired confidence upon taking over on Oct. 1 last year. He’s been busy remaking the company, but investors seem to be losing patience. GE stock now has fallen 23% since Culp replaced John Flannery.
The Q3 report could go a long way toward bringing back some of last year’s optimism, and toward getting General Electric stock back into the double-digits. Earnings expectations are not particularly high. Guidance simply for positive free cash flow would be a good start. And a report with no surprises, particularly from GE Capital, could allow investors to again focus on the potential of the turnaround here.
The options market is pricing in an over 6% move in GE between now and next Friday. That might actually be a bit light. A solid quarter, combined with commentary from Culp on the post-earnings call, could well spike GE as investors see progress toward long-term targets.
But it’s clear that confidence in GE is fragile. Any bad news, of any kind, could lead GE to retest December lows below $7.
Source: Anna Hoychuk / Shutterstock.com
Earnings Report Date: Wednesday, October 30, after market close
Apple (NASDAQ:) stock has absolutely roared into earnings. Shares have risen over 25% since Aug. 5. Apple stock has moved to an all-time high, and the company passed Microsoft as the world’s most valuable.
Those gains put an awful lot of pressure on the company’s fiscal fourth-quarter report. As Will Healy , valuation now looks stretched relative to historical levels. AAPL still looks reasonably cheap relative to the broad market, but the company’s reliance on the iPhone raises an obvious risk to long-term earnings growth.
At the moment, however, investors are shrugging off those worries. Bulls argue that the iPhone still can print cash, while the company’s pivot to services drives growth. Q4 numbers, and Q1 guidance, need to confirm that story.
Consensus EPS estimates suggest a relatively flat quarter on a year-over-year basis, meaning that Apple only needs to grow — at all — to top headline expectations. Revenue in China has improved in recent quarters, and will be a point of focus. Services revenues need to keep growing double-digits. Commentary on the iPhone 11 will be important as well.
That said, expectations seem high, and perhaps worrisome. We’ve seen AAPL stock give back gains before, most notably after last year’s fourth quarter report. A guidance cut for fiscal Q1 followed in January, and sent Apple stock down 10% in a single day.
Since then, the stock has risen a stunning 71%, and added over $450 billion in market value. That leaves little room for error. And with to literally move markets, any weakness in Apple earnings could impact trading elsewhere.
Source: Ink Drop / Shutterstock.com
Earnings Report Date: Wednesday, October 30, after market close
Facebook (NASDAQ:) stock has been mostly a trader’s plaything over the past two years. The stock has risen just 8% over that stretch, lagging both the S&P 500 and the Nasdaq Composite.
Obviously, external events, among them the Cambridge Analytica scandal and ensuing regulatory worries, have played a role. But Facebook earnings have been pressured as well. Guidance for higher spending this year sent FB stock to the last summer. That guidance has turned out to be accurate: 2019 profits, according to the average analyst estimate, are expected to drop about 20%, due to significantly higher operating expenses.
So this is a 2020 story, and that’s where the Q3 release on Wednesday afternoon gets interesting. I’d expect Facebook to beat consensus EPS expectations, as it has every quarter for at least five years. But I’d also expect management to give some color, though not official guidance, for next year.
Those expectations are high. Wall Street expects profits to increase over 50% in 2020, as the company laps the impact of 2019’s higher spending. As we saw last year, if Facebook signals that more spending is on the way, the market will not react well. But with FB stock downright cheap relative to current 2020 EPS expectations, the status quo and good news from Instagram and WhatsApp might be good enough for a bounce back above $200.
Source: Kristi Blokhin / Shutterstock.com
Earnings Report Date: Thursday, October 31, before market open
For Altria (NYSE:), the mission on Thursday is simple: settle the market. MO stock has bounced nicely since touching a five-year low last month. But its earnings multiples remain historically low, as I wrote last week.
There are reasons why. The company’s of a stake in Juul already looks like a disaster. A hoped-for reunion with Philip Morris International (NYSE:) fell through. Smoking rates continue to decline, and neither vaping nor the company’s IQOS product seem likely to pick up the slack.
That said, MO stock is awfully cheap. A 7% dividend yield is attractive. And as I argued last week, more regulation may well help Juul and IQOS. After all, the late 1990s tobacco settlement proved to be a boon for Altria stock.
As long as Q3 earnings are in line, and management can calm the market on the post-earnings conference call, the recent gains in MO stock can continue. Any surprises, however, are likely to be met with a resumed selloff.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.