Q1 earnings season is off to a sort of meh start. Last week, bank stocks rallied off of very low expectations, poor relative performance and results that were good enough to cause a bit of a short squeeze. That said, given the political, regulatory, uncertain global economy and the unlikely event of much higher interest rates any time soon, Q1 might be as good as it gets for bank stocks. While the XLF, the Financial Select etf, has had a very healthy 20% bounce off of its February lows, but not that much more dramatic than the S&P 500’s (SPX) 15% gains during the same period, especially when you consider the relative under-performance of the XLF on the way down. To my eye the XLF remains in a well defined downtrend:
This past week we got a slew of mega-cap tech earnings from IBM, INTC, QCOM & MSFT that all disappointed vs expectations, with all of the stocks down since their reports. There is a pretty clear take-away that business spending on tech is currently soft, with poor visibility. The first three look like absolute value traps to me, trading well below a market multiple, buying back their stock hand over fist, all with dividend yields 2x that of the 10 year U.S. yield, with expectations for either eps and sales declines of low single digits growth, a ton of exposure to dollar strength and rely on emerging markets for future growth. MSFT was the big surprise given the positive sentiment, but coupled with (GOOGL’s eps miss, more below) and the potential for AAPL and FB’s results next week to be a sort of make or break for large cap tech, the XLK, the Technology Select etf, could have just hit up against a massive technical wall at the prior highs;
GOOGL’s earnings miss last night was not insignificant, but despite the company’s efforts to make their results more transparent by separating their core ad business from other, in some ways it just seems more confusing. GOOGL in my mind remains a black box. But barring a market meltdown, I’d be kind of surprised to see the stock below its 2016 lows ($680ish) anytime soon, while new highs are unlikely too, unless the company puts up a big beat. $700 to $800 could be a range the stock finds itself in for the time being, assuming a churning broad market:
Earlier in the week Coca-Cola (KO) disappointed, and the stock is down 6% on the week from, causing investors to start to think twice about what they are paying for the yield and perceived defensiveness of consumer staples. The XLP, the etf that tracks staples, has had a sharp reversal from all time highs and looks like it will be retracing the entire move of the recent breakout:
Last night we had SBUX and V offer less than stellar results, with both stocks priced to perfection near 30x expected 2016 eps, I’d say there was little margin for error and the stock’s both down 3 to 4% makes sense give their recent runs.
This morning we have had sort of a mixed bag, MCD beat and the stock is up, and I would assign that more to be stock specific with continued tailwinds from menu changes, while Industrial stocks were all over the place with GE solid, and HON and CAT slightly disappointing.
So Q1 earning haven’t exactly been gangbusters for U.S. multi-nationals, but to me it is more a function of expectations and market sentiment. While the Q1 yoy decline in S&P earnings may end up being less than the expected high single digit decline heading into the quarter, it is still the 4th consecutive decline, and shows just how fragile the global economy is at this stage of the recovery. We rallied into Q1 earnings season, I suspect we may retrace some of the move on the way out. But that will also be function of the U.S. dollar. U.S. multinationals clearly got some cover from the dollar’s more than 5% decline since the start of the year, but if the DXY were to bounce from the level it has bounced 5 times over the last year, this could very quickly become a headwind, and at the very least, pose massive problems for company’s trying to forecast their businesses to investors.
