Markets

Daily Markets: Earnings Season Kicks Off

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Today’s Big Picture

Today kicks off December quarter earnings season with earnings for the S&P 500 expected to have declined by 2% in the December quarter according to FactSet. If earnings do in fact contract during the December quarter, it will be the fourth consecutive quarter of year-over-year net income declines for the S&P 500. Despite this, the index managed to make yet another new high as investors begin to focus on EPS growth prospects for the coming year; per FactSet the S&P 500 group of companies are expected to grow their collective EPS by 9.5% growth YoY in 2020. That rebound is expected to be led by the 4.7% YoY growth in earnings for the S&P 500 in the current quarter and strengthen throughout the year.  

We'd note the S&P 500 is trading at a P/E ratio of 18.5x expected 2020 EPS versus its 10-year average of 14.9x. Quite the premium, and in our view, over the coming weeks investors are likely to be laser-focused on both EPS guidance to be issued during the December quarter earnings season and the degree to which the speed of the global economy looks to improve in the coming quarters. Should signs suggest those items may not live up to expectations as the phase one trade deal moves into the rearview mirror, odds are investors will begin to question the market’s current valuation. 

We’d also note another item investors will want to keep tabs on, which is also one of the likely reasons why the S&P 500 has continued to put in new highs. The percentage of "Big Tech" — Apple (AAPL)Microsoft (MSFT)Alphabet (GOOGL)Amazon (AMZN) and Facebook (FB- comprising the S&P 500 Index's capitalization has hit a record 18%. As Morgan Stanley (MS) noted, that percentage is higher than the tech bubble. Another item for investors to factor into their investing mosaic.

Tensions in the Middle East appear to no longer be a concern as yesterday saw record closes again for the Nasdaq Composite, Nasdaq 100, the NYSE Composite and the S&P 500 on the news that the US will remove China from the list of currency manipulating countries, further increasing the optimism around the upcoming trade agreement getting signed.

Despite favorable economic data out of China, Asian equities finished the day mixed. European equities are down modestly, and US equity futures point to a similar opening. The start of the December quarter earnings season begins today with a handful of bulge bracket banks and we suspect their results and guidance, as well as comments on the economy, will determine how US equities finish the day.

Data Download

December exports from China jumped 7.6% YoY, marking the first increase in five months and well above the expected increase of 3.2%. Meanwhile, December imports into China jumped more than 16% YoY, hitting the highest level since October 2018. Imports were led by copper, iron ore, soybeans, rubber, and pork.

The December Economy Watchers Current Survey for Japan rose to 39.8 from 39.4 in November, well ahead of the expected 36.9 reading. The Outlook survey for the month rose to 45.4, besting the consensus view of 44.7. 

In the US, the December NFIB Small Business Optimism Index fell to 102.7 from 104.7 in November, missing the consensus forecast for December of 104.9. Seven of 10 components, including earnings trends, current job openings, and current inventory fell MoM, while expectations for real sales to move higher and the economy to improve both moved higher vs. November.  

The Consumer Price Index for December will be released by the Labor Department today at 8:30 am ET with expectations for both headline and core to see a 0.2% MoM increase, making for a 2.3% annual rate. This would be above the Fed's target of 2%, which could affect the Fed's current monetary policy. 

Stocks to Watch

Shares of Delta Airlines (DAL) are getting some lift in pre-market trading following the company's December quarter results that beat top and bottom-line expectations. EPS for the quarter rose more than 30% YoY reflecting the combination of strong travel demand and lower fuel costs. Delta guided current quarter unit revenue growth of 0%-2% and cost per available seat mile growth of 2%-3%. Its 2020 EPS forecast is $6.75-$7.75 vs the $7.17 consensus.

JPMorgan Chase (JPM) reported December quarter results that also topped expectations. GAAP EPS for the quarter was $2.57, $0.22 better than expected, while revenue for the quarter rose 9% YoY to $29.2 billion, $1.5 billion better than the consensus forecast. The company’s investment bank produced record revenue for the December quarter led by a rebound in trading revenue, particularly for bonds. Lower interest rates weighed on quarterly net interest income and firmwide loan growth fell 1% on a reported basis. 

Yet to come this morning are earnings from Citigroup (C) and Wells Fargo (WFC):

  • Citigroup is expected to report EPS of $1.83 on revenue of $17.95 billion
  • Wells Fargo is expected to report EPS of $1.10 on revenue of $20.1 billion. 

Citing last month's complaint filed by the Federal Trade Commission, Post Holdings (POST) and TreeHouse Foods (THS) have canceled an agreement for Treehouse to sell its ready-to-eat cereal business to Post. 

Yesterday Tesla (TSLA) shares rose above $500 for the first time, closing the day up 10.7% at $529.20.

Athletic apparel-maker Lululemon Athletica (LULU) gained 4.5% yesterday in response to the company boosting its January quarter guidance above consensus expectations, which we discussed in yesterday’s Daily Markets piece.

On the other end of the retail spectrum, struggling retailer JCPenney (JCP) experienced its single worst trading day yesterday, falling 15.8% as many brick-and-motor companies struggle to survive. The company’s shares have lost 35.6% over the past year. Macy’s (M) confirmed recently that it will close 28 locations and one Bloomingdale’s store in the next few weeks. Kohl’s (KSS) reported recently a 0.2% comp-store sales decline over the holidays.

Shares of GameStop (GME) dropped 9% in extended trading yesterday after the company announced holiday sales that were down sharply from the previous year and lowered guidance. The company now expects same-store sales to be down between 19%-21%, a bigger hit than the high-teens drop it had earlier estimated.

Retailer Tilly’s (TLYS) announced yesterday that comparable sales during the 9-week holiday period declined 2% while total sales were up 1.1%. The company expects Q4 comparable store net sales to fall by 2%-3% with EPS in the range of $0.18-$0.20. Shares fell 22% yesterday.

Brick-and-motor retail isn’t the only spot struggling from lack of consumer spending as according to Black Box Intelligence, US restaurants saw a 2.1% YoY drop in comparable-store sales in December - the worst decline in over two years. Yesterday Carrol’s Restaurant Group (TAST), which is the single largest franchisee of Burger King restaurants in the US pre-announced results for the fourth quarter that saw a 2% increase in same-store Burger King units. Shares fell 13.3% yesterday and are now down 39.5% over the past year.

After the close OrganicGram (OGIand Washington Federal (WAFD) are expected to report their latest quarterly results. 

For a more detailed look at upcoming earnings reports, we recommend checking in with Nasdaq’s earnings calendar page

On the Horizon

    • Upcoming IPOs:
        • Clinical stage biopharmaceutical company I-MAB (IMAB) will offer 7.4 million shares in the $12-$15 range and trade on the NYSE.
        • China-based mobile app developer LIZHI (LIZItargets a 4.1 million share offering in the $11-$13 price range. After the IPO, the shares are slated to trade on the Nasdaq.
        • Vertically-integrated real estate finance company Velocity Financial (VEL) will look to offer 7.3 million shares in the $14-$16 range and trade on the Nasdaq.
        • For a complete list of upcoming IPOs by month, please visit the Nasdaq IPO Calendar.
    • Dates to mark:
        • January 12-14: The National Retail Federation’s NRF 2020 conference
        • January 13-16: ICR Conference 2020
        • January 13-16: The JPMorgan Chase (JPM) Healthcare Conference 
        • January 15: Chinese Vice Premier Liu He will be in Washington to sign the “phase one” trade deal.

Thoughts for the Day

“Sometimes when you’re in a dark place you think you’ve been buried but you’ve actually been planted.” ~ Christine Caine

Disclosures

lululemon athletica (LULU) and Tesla (TSLA) are constituents in Tematica Research’s Cleaner Living Index

Microsoft (MSFT) is a constituent in Tematica Research’s Thematic Dividend All Stars Index.

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.

Read Chris's Bio

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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