Markets

Daily Markets: Blowout Tech Earnings and Grim Economic Data Send Conflicting Messages

Apple store during coronavirus
Credit: Brendan McDermid / Reuters - stock.adobe.com

Today’s Big Picture

Equity markets in Asia finished the week off on a mixed note with Japan's Nikki slumping more than 2.82% and the Hang Seng down 0.50% while China's Shanghai index finished the day up 0.70%. European equities were mostly higher by mid-day trading and following last night’s blow-out quarterly results from Apple (AAPL)Amazon (AMZN)Alphabet (GOOGL), and Facebook (FB) U.S. futures point suggest a positive open when trading begins later this morning. However, when we consider that shares of those technology companies are moving nicely higher in pre-market trading, one has to consider that excluding their pull on U.S. equity futures the rest of the market is far less robust. 

Part of that likely reflects the continued distance between Democrats and Republicans in Washington when it comes to the next round of pandemic related economic stimulus. The catch, however, is emergency unemployment benefits are set to expire today, and so far it seems there is no follow on plan to be had. Odds are that means investors will be seeing through today’s June Personal Income & Spending report as they gauge the consumer’s ability to spend as we enter what is normally the Back to School spending season. Should little progress be made in Washington today, we suspect we will once again be closely watching the Sunday talk shows for hints for what could come next in terms of possible pandemic aid packages and their timing. What we hear will help set the tone for next week, which also brings more than 1,400 earnings reports and the start of the July economic data that will likely reflect the rebound in the coronavirus. 

Data Download

Coronavirus

Former presidential candidate Herman Cain has died at 74 years of age from COVID-19, more than a month after he was diagnosed. He was diagnosed two weeks after attending a reelection rally for President Trump in Tulsa, Oklahoma on June 20, at which most attendees did not appear to be wearing masks inside.

Some more promising news came yesterday on the vaccine front as a single dose of Johnson & Johnson’s (JNJ) experimental coronavirus vaccine generated a "robust" level of protection in 6 non-human primates. The vaccine-induced the production of "neutralizing antibodies" and provided complete or near-complete protection against COVID-19 in the animal's lungs. All had no detectable levels of the virus in the lower respiratory tract after exposure and one showed very low levels of the virus in a nasal swab at two different times. Human clinical trials are now underway in the U.S. and Belgium. According to its CEO, the company, which has received financial support from the U.S. government and others, plans to make its vaccine available on a not-for-profit basis.

As if the obvious hits to the economy from the pandemic weren’t bad enough, businesses also face liability risks from their employees, customers, and even suppliers. McDonald’s (MCD), along with some of its franchisees, is already facing lawsuits from employees related to its response form the pandemic and has implemented a range of safety measures from plexiglass partitions to requiring masks. Now the company is partnering with the Mayo Clinic on defining best practices to mitigate the spread of COVID-19. The financial terms of the partnership have not been disclosed.

California is back to reporting over 10,000 new coronavirus cases a day, reporting just under 10,200 cases yesterday after having seen less than 9,000 cases per day for four consecutive days. After Wednesday's record-high 197 deaths, Thursday the state reported 194 fatalities from COVID-19. Florida and Arizona both reported a record-high number of deaths in a single day yesterday as well. Texas reported a record-high number of deaths on Wednesday.

Wisconsin is the latest state to require its residents to wear face masks, following in the steps of Ohio, Indiana, and Minnesota, which did the same last week.

International Economy

Japan Consumer Confidence increased to 29.5 in July from June’s 28.4, hitting the level in four months. June Housing Starts in Japan fell 12.8% YoY, marking the twelfth straight monthly decline. June Construction Orders in Japan fell 13.4% YoY.

Following the 12.7% jump in May, Germany’s retail sales fell 1.6% MoM in June vs. the expected 3.3% drop. On a YoY basis, Germany's retail sales rose 5.9%.

The flash 2Q 2020 GDP growth rate for the Eurozone fell 12.1% QoQ and was down 15% on a YoY basis. The July flash inflation rate for the Eurozone inched up to 0.4% YoY vs. June 0.3% YoY increase. 

Domestic Economy

Yesterday's first estimate for second-quarter GDP was ugly as expected, with a contraction of 32.9%, a catastrophic contraction that is unprecedented in American history. The consumption of services contributed -22.9% to GDP - not all that surprising with all the social distancing. Investment contributed -9.4%. Trade was brutal, with exports contributing -9.4% to the decline in GDP but imports contributed +10.1%. Looking forward, the $600/week wage replacement scheme that just ended was contributing over 4% of Q1 GDP each week and that plan is expiring. With 28.8 million Americans receiving unemployment benefits, that support is a massive boost to a struggling economy.

Yesterday initial jobless claims rose from last week’s 1.422 million to 1.434 million, which was the first time that initial claims have risen week over week since this nightmare began. While it was disappointing to see jobless claims on the rise, the increase was less than the expected 1.445 million. Continuing claims also rose to over 17 million versus expectations for an increase to 16.2 million. 

Later today we will get Personal Income and Spending, Personal Consumption Expenditures, the Employment Cost Index, and the University of Michigan Consumer Sentiment Report.

Markets

Yesterday’s market was mixed with the S&P falling as much as 1.7% intraday, but closed down just 0.4% as did the Russell 2000. The Nasdaq Composite gained 0.4%, the Nasdaq 100 0.5% and the Dow lost 0.9%. The brutal read on the economy in the June quarter was countered by the four $1 trillion market cap stocks all reporting Q2 results that were much better-than-expected - more on that below. The yield on the 10-year Treasury fell to a near-record low of 0.538%. The U.S. dollar index dropped 0.4% and gold fell 0.8%.

Stocks to Watch

Caterpillar (CAT) announced Q2 (Jun) earnings of $1.03 per share, $0.31 better than the consensus estimate of $0.72 as revenues fell 30.7% YoY to $10 B versus the $9.4 B expectation. The company stated that profit per share in the second quarter of 2020 excluded pre-tax re-measurement losses of $122 M, or $0.19 per share, resulting from the settlements of pension obligations. Due to continued COVID-19 uncertainty the company withdrew its earnings guidance in March and did not provide FY2020 guidance on the latest call.

Colgate Palmolive (CL) reported June quarter EPS of $0.74, $0.05 better than expected as revenue for the quarter rose 0.5% YoY to $3.89 B. Organic revenue for the quarter rose 5.5% vs. the 3.2% consensus, lapping tough comparisons in the year-ago quarter when organic revenue rose 4.0%. Despite the pandemic, the company's global market share in toothpaste remained 40% YTD while its position in manual toothbrushes remained at 31% YTD. Seems folks are still brushing their teeth, and we thank you for it.

Facebook (FB) The company stated it is seeing signs of normalization including user growth and engagement as shelter in place measures have eased around the world, particularly in developed markets. As shelter in place restrictions continue to ease, the company expects a number of metrics to be flat or slightly down in most regions in Q3 as compared to Q2. The company indicated that July month to date YoY ad revenue growth rate was approximately in line with Q2 and that it expects Q3 to follow that trend. Assumedly, ad revenues will pick up when two things happen: i) advertising clients feel assured that the company has sufficient mechanisms in place to combat online racism and hate-speech, and ii) advertisers' budgets have enough room to continue programs with Facebook.

Under Armour (UAAannounced a Q2 (Jun) loss of $0.31 per share, $0.09 better than the consensus estimate of ($0.40) as revenues fell 40.6% YoY to $707.4 M versus the $538.23 M expectation. The company stated it continues to anticipate material impacts on its business results for the remainder of 2020 given the continuing pandemic.

Shares of Nokia (NOK) are moving higher in premarket trading following the company reporting better than expected June quarter EPS and boosting its 2020 EPS guidance to €0.25. The company noted that during the June quarter, its 5G win rate outside of China remained over 100%; including China its win rate was in the low 90% range. 

Apple (AAPL) reported better than expected June quarter results with revenue up in every segment and announcing a four-for-one stock split that will occur after the market close on August 24. For the quarter, iPhone revenues rose 1.5% YoY to $26.4 billion vs the $22.0 billion estimates while its Services revenue clime 1.4.8% YoY to $13.2 billion vs. the expected $13 billion. 

Similarly, Alphabet (GOOG) delivered June quarter results that topped Wall Street expectations on the top and bottom line despite the 1.7% YoY drop in revenue. During the quarter, the company saw a rebound in its core advertising business, which was aided by strong growth in Google Cloud and Other Revenues. Google shared it is seeing signs of stabilization across most verticals, including a gradual return in search activity, resulting in higher advertising spending.

June quarter results at Amazon (AMZN) also topped expectations with the company delivering EPS of $10.30 per share, $8.68 better than the expected $1.62; revenue for the quarter rose 40.2% YoY to $88.91 B, well ahead of the expected $81.27 B. Of note, Amazon Web Services revenue jumped 29% YoY with an operating margin of 31.1% for the quarter vs. 25.3% in the year-ago quarter. That fueled Amazon's overall operating income to climb almost 90% YoY to $5.84 billion vs. the company's guidance of $(1.5)-1.5 B and the $1.13 B consensus despite spending $4 B on incremental COVID-19 related costs. The company guided revenue for the current quarter to $87-$93 B vs. the $86.36 B consensus. 

Ford Motor (F) announced a Q2 (Jun) loss of $0.35 per share, still $0.81 better than the consensus estimate of ($1.16) as automobile revenues fell 53.5% YoY to $16.62 B versus the $15.63 B expectation. The company stated that after being idled for six weeks, plants in North America smoothly resumed operations and ended the quarter at about 95% of their pre-pandemic production levels. Strong F-series sales continue to be a dominate feature as the company made some headlines with both the reintroduction of an updated Bronco and the all-electric Mustang Mach-E which it hopes will “delight customers, drive growth and increase profitability.” The company stated it expects “no meaningful change in the current economic conditions” for the back half of 2020.

Shake Shack (SHAK) missed June quarter expectations on both its top and bottom line as revenue for the quarter slumped 39.9% YoY reflecting a 49% drop in same-Shack sales. With sales recovering during the quarter and into July, primarily across most markets outside of New York City, the company now expects to open between 6-11 additional domestic company-operated Shacks, bringing its total new openings to 15-20 for the full year, back-weighted towards the end of this year, for a total of 15 to 20 for the full year.

By comparison, El Pollo Loco (LOCO) reported June quarter results that topped expectations despite system-wide comp sales falling 9.7%. Except for nine restaurants in Houston and one in Utah, all of the company's restaurants are operating on a take-away, mobile pick-up and delivery basis, as well as maintaining drive-thru operations where available. Currently, 192 out of 196 company-operated El Pollo Loco restaurants are in operation, while 279 of 283 franchised El Pollo Loco restaurants are in operation.

Snap-On (SNA) reported June quarter results ahead of Wall Street expectations despite the almost 24% YoY drop in revenue for the quarter. The company reported improving trends in the second quarter and expected further sequential improvements. 

After today’s market close, there are no expected earnings reports to be had. Your authors wish you a fun and restful weekend because next week brings more than 1,400 such reports. Those looking to get a jump on that barrage should visit Nasdaq’s earnings calendar page.

On the Horizon

  • Dates to mark:
      • August 3: ISM Manufacturing PMI 
      • August 5: ADP Nonfarm Employment and ISM Non-Manufacturing PMI
      • August 7: Nonfarm Payrolls and Unemployment Rate
      • August 10: JOLTs report
      • August 11: PPI
      • August 12: Core CPI
      • August 14: Retail Sales

Thought for the Day

“You learn from the mistakes you make and from mistakes other people make. The truth is, you don’t learn from success; you learn from failure.” ~ George Clooney

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Chris Versace

Christopher (Chris) Versace is the Chief Investment Officer and thematic strategist at Tematica Research. The proprietary thematic investing framework that he’s developed over the last decade leverages changing economic, demographic, psychographic and technology landscapes to identify pronounced, multi-year structural changes. This framework sits at the heart of Tematica’s investment themes and indices and builds on his more than 25 years analyzing industries, companies and their business models as well as financial statements. Versace is the co-author of “Cocktail Investing: Distilling Everyday Noise into Clear Investing Signals” and hosts the Thematic Signals podcast. He is also an Assistant Professor at NJCU School of Business, where he developed the NJCU New Jersey 50 Index.

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Lenore Elle Hawkins

Lenore Elle Hawkins serves as the Chief Macro Strategist for Tematica Research. With over 20 years of experience in finance, her focus is on macroeconomic influences that create investing headwinds or tailwinds. Lenore co-authored the book Cocktail Investing and in addition to her Tematica work, provides M&A consulting services for companies in Europe looking to expand globally. She holds a degree in Mathematics and Economics from Claremont McKenna College, an MBA in Finance from the Anderson School at UCLA and is a member of the Mont Pelerin Society.

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Mark Abssy

Mark Abssy is Head of Indexing at Tematica Research focused on index and Exchange Traded Product development. He has product development and management experience with Indexes, ETFs, ETNs, Mutual Funds and listed derivatives. In his 25 year career he has held product development and management positions at NYSE|ICE, ISE ETF Ventures, Morgan Stanley, Fidelity Investments and Loomis Sayles. He received a BSBA from Northeastern University with a focus in Finance and International Business.

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