Published April 20, 2018
The bullish case for stocks rests on surging corporate earnings. The bearish case rests on fears of rising interest rates, uncertainty about trade policy, and a general hangover from a very strong 2017. Early on in the quarterly earnings cycle, companies are providing the strong results.
However, the stock market’s reaction has been mixed, with a quick negative response to even the slightest sideways glance from executives on their earnings calls. This week we got blowout earnings from Goldman Sachs only to see the stock fall for the week. Banks got blasted a week ago when they brought forth fantastic results while investors found the underlying business metrics lacking. Nike’s stock vaulted higher on strong earnings. Two days later sellers emerged to drive the stock right back down. And pity poor semiconductor makers. Their growth rates in sales and profits are exceptional. But their stock prices? Overwhelmed by fears the market for their products has peaked. This week’s report from leading semiconductor fabricator Taiwan Semi sent that stock almost -10% lower than where it began the month. Concerns spread from there to a big consumer of Taiwan Semi’s product, Apple, whose shares stumbled, which in turn dragged the overall market lower.
Bottom line: the market is still struggling to escape the market correction that took hold in February. To wit, over the past few weeks, energy and utilities are the only winning sectors.
Those two sectors account for a paltry 9% of the overall stock market, just less than the three largest companies in the S&P 500: consumer tech powerhouses Apple, Microsoft, and Amazon. Apple sneezes and the stock market catches a cold unless offset by major moves elsewhere. Perhaps Apple’s earnings report on May 1st will convince the market there’s nothing really to worry about.
It’s not all gloom though. The bright side of the market comes from smaller stocks which have shown a better rebound from the market’s recent pullback to sit only 3% below their all-time highs.
Stock investors endured a choppy, earnings-fueled week of trade with market indexes ultimately clinging to a slightly positive result. Monday began well with markets reacting positively to news that the strike on Syria’s chemical weapons facilities had finally occurred and were perhaps less than feared. Market indexes gained +0.8% with earnings from Bank of America (BAC) failing to spark enthusiasm while trucking company earnings did find some love among investors. Netflix (NFLX) once again clobbered earnings estimates sending that member of the FANG stock contingent higher by +9% to lead the Nasdaq 100 (QQQ) to a +1.7% gain Tuesday. Wednesday saw IBM’s earnings disappoint leading to a selloff in that Dow Industrial Average component. Oil prices resumed their charge upward with a +3% move on the day. Earnings from United Continental airlines (UAL) and railroad CSX (CSX) sent those stocks notably higher while tobacco company downgrades weighed on the lagging consumer staples sector. Market indexes ended flat. Stocks fell -0.6% Thursday with investors reacting negatively to earnings from Proctor & Gamble (PG) and Taiwan Semiconductor (TSM), whose outlook caused a selloff in the influential semi group. Interest rates popped higher on fresh concerns that the rise in crude oil would spark higher inflation. That move carried over into Friday’s session where rates pushed further upward. The aggressive move in longer-term rates eased concerns over the flattening yield curve as interest rate spreads widened. That action put a bid under bank stocks as banks are seen benefitting from higher interest rates. However, the rising interest rates dented stocks again Friday as did a continued selloff in shares of Apple (AAPL) which slumped -4%. Investors have read the prior day’s poor guidance from Taiwan Semi as reflective of weakening sales of iPhones. A late rally helped limit the day’s damage as a near-2% slide in the Nasdaq 100 was pared to -1.3%.
The up then down week left the S&P 500 higher by +0.55% on the week. The Nasdaq 100 added a similar +0.58%, while small-cap stocks continued to outperform with a +1.04% rise.
Warm wishes and until next week.