Your earnings roadmap is here

<span id="hs_cos_wrapper_name" class="hs_cos_wrapper hs_cos_wrapper_meta_field hs_cos_wrapper_type_text" style="" data-hs-cos-general-type="meta_field" data-hs-cos-type="text" >Your earnings roadmap is here</span>

Stocks gained yesterday as traders began positioning for the wave of earnings starting later in the week. Today’s FOMC minutes will give us further insight into just how worried members were to cause all but one of them to elect to cut interest rates by ½ of a percentage point, begging a further question whether they are still worried.

 

Here comes the earnings storm. It seems like at the start of every earnings season, most of the analysts start saying “this is the one.” I am chuckling… ALL earnings seasons are the one! Beating earnings estimates is one thing, and it used to be good enough for applause. As the market picked up, companies had to have good forward guidance. As the market extended further, companies had to demonstrate solid earnings growth. And as the market climbed yet further, earnings growth not only had to exceed analysts' expectations, but also dazzle investors with some sort of blowout growth numbers or risk a selloff on market disappointments. Indeed, the bar is high these days, as it should be. With the S&P500 and the Nasdaq right near their all-time highs and the Dow pretty close, the bar is, perhaps, higher than ever. Throw in global turmoil, a contentious, close election, possible supply chain disruptions, lower-but-still not gone inflation, and a ambiguous-statement-making Fed… well, let’s just say the bar is high, high, high.

 

In the weeks ahead we will see companies come up to the podium and announce their results. They tend to announce in sector clusters and follow a pattern… generally, of course. Earnings season is kicked off by Financials (starting this Friday, with (JP Morgan Chase), followed by Technology , Communications Services, Consumer Discretionary. Healthcare, Energy, Consumer Staples, Industrials tend to report mid-cycle, while Utilities, Materials, and Real Estate tend to get last licks. Now, it is important to note that this is just a general map. Tech-related growth companies, for example, may cluster around a week (regardless of sector), though they attempt to spread… in order to get the spotlights… THEY DESERVE. Regardless of the order, there are 11 sectors, and each has a critical theme to be watched for closely. Here is your very high-level guide to navigating the next few weeks.

 

Financials: This sector includes names like JPMorgan Chase, Goldman Sachs, AIG, and MetLife. That’s right, banks, investment banks, and insurance companies. For banks, we look for health, growth in lending, and net interest margin. For investment banks we look for all the same attributes as banks but add in trading fees and investment banking fees. For insurance companies we look for regulation changes (election year!!) along with trends. For property and casualty providers, we may seek to learn more about performance during a recent OR current crisis. With the recent Fed shift to rate-cutting, we will closely assess how banks expect the changes to impact results going forward. For investment banks, we will want to learn more about fee-based businesses like investment banking revenues and wealth management income, among other things. This sector has gained an impressive +20.45% year to date and earnings will have to match returns.

 

Technology: This sector includes most of household growth favorites like Apple, NVIDIA, and Microsoft. The sector is broken down into three industry groups, hardware, semiconductors, and software. As with all growth companies, but particularly in technology, we will be looking for continued earnings/revenue growth with strong forward guidance. As you may suspect, artificial intelligence (AI) has been a big driver for all the industries in this sector in the past year. Investors will be keen on learning how many of these companies are capitalizing on AI. In other words, are they making money on AI and is it worth the large capital investment? Let’s not forget about cloud revenues and security. This is one of those sectors where it may not be enough to simply beat estimates and forward guidance estimates. Investors are expecting nothing short of fireworks for this top performing sector which logged a +30.79% YTD return.

 

Communications Services: This interesting collection of companies include media and entertainment companies like Meta and Alphabet in addition to traditional telecom providers like AT&T. The former will be judged similar to technology but will also be assessed on subscriber growth and ad revenues while the latter will be judged on their ability to pay the big dividends that investors expect from them. With telecoms, cash flow is king; you need it to pay dividends 😉. This sector returned +28.5% year to date helped along by Meta and AT&T and less so from Alphabet.

 

Consumer Discretionary: This sector has an interesting array of companies including favorites like Tesla and Amazon, but also companies like McDonalds and Nike. Big themes to watch here will be more company specific, but high-level drivers will be supply chain health (inventory buildup), inflation impacts, and same-store revenue growth. For autos it will be units shipped and EV demand and for retailers it will be brick and mortar versus online sales. Amazon is the odd card here, because it competes with Walmart (consumer staples) as well as tech companies like Apple (hardware) and Microsoft (cloud). With an +11% YTD return, this sector will be assessed for possible upside given ongoing consumer price sensitivity, lower interest rates, and forward revenue guidance (especially leading into the holiday season).

 

Healthcare: This sector includes providers like UnitedHealth as well as pharmaceuticals like Pfizer and Eli Lilly. For pharma it is all about the pipeline. You can’t avoid the weight loss drug discussion and each company’s approach to the booming growth in demand. For providers it will be about costs, regulations, mergers and acquisitions, and pricing. This industry is one of the last inflation holdouts. This sector as a whole had a respectable growth +11% YTD with service providers making the largest contribution.

 

Energy: This sector includes usual suspects ExxonMobil, Chevron, and Schlumberger. As you might suspect oil and gas prices are a big factor in the success of these companies. Regulations and upcoming elections will be considered as this industry reports. Supply, demand, and Middle East tensions will dominate the discussion. Also ever-present is ESH and renewable energy. Earnings growth is always important and with declining commodity prices, growth may disappoint this quarter. Year to date, the sector has returned +9.6%.

 

Consumer Staples: This sector includes gotta-haves like Proctor & Gamble, Pepsi, and Walmart. This sector is the go-to when investors expect economic decline. Inflation impact, lower interest rates, supply chain issues, brand loyalty, and potential growth abroad will be the hot topics in earnings reports. Walmart being a bit of an outlier here will be assessed against rivals like Costco and Target but also against e-tailing giant Amazon. Staples returned +9.6% year to date and its future returns will be determined by economic conditions as well stand-out strategies.

 

Industrials: This broad sector includes companies like Boeing (aerospace and defense), Caterpillar (machinery), Builders FirstSource (building products), and General Electric. While each industry has its own guidelines, global supply chain / logistics, commodities prices (the stuff that goes into the… stuff), and infrastructure spending (ELECTIONS 😉). Of course, each individual company will have its own specific issues, e.g. Boeing’s long list of woes. This sector has returned +18.7% year to date. Earnings are expected to have declined this quarter, keep an eye out for the winners.

 

Utilities: Duke Energy, NextEra, and PG&E are in this sector. Utilities are safety stocks which get a boost when the economy is expected to slow. The sector is also highly sensitive to interest rates and bond yields. They borrow a lot of money, and they pay dividends. So, they rely on selling bonds to pay the bills and their dividends are closely compared to bond yields. Each company is very unique in its approach to renewable energy, how they manage their balance sheets, and their capital expenditures. Balance sheet health is critical in these situations. The sector has returned +25.4% year to date and is considered somewhat overbought as investors clamored to buy in the sector to protect from economic downturn and lower bond yields which make utilities stocks more attractive.

 

Materials: This sector includes companies like Dow, and Rio-Tinto. In this sector it is all about commodity pricing. Think lithium for batteries and its supply and demand. There is also a large global demand implication as much demand comes from more production-focused economies abroad. Regulations have an impact on this group. Product blend and global demand will be looked at closely in reports. The sector returned +10.46% year to date and it is closely tied to economic health.

 

Real Estate: This sector has been under pressure with the Fed’s 2022/2023 rate hikes and it includes companies like Simon Property Group, and Prologis. As you might imagine interest rates and questionable property valuations will continue to be questioned here. Occupancy rates, rent growth, and the ability to pay dividends will be closely assessed. The sector has returned +8% year to date and earnings are expected to decline quarter over quarter. As the types of assets owned across the sector varies widely, all companies need to be assessed individually and compared to industry and sub-industry comps.

 

 

WOW! That was a lot for a single morning and my fingers need a rest, but I wanted to provide a high-level lay of the land as we start earnings season. Financials and tech will be the first down the shoot and will have a big impact on the market because of timing and… because of… … tech 😊. Get ready and buckle up, lots of homework will be assigned in the weeks ahead. Don’t worry, I got you covered.

 

YESTERDAY’S MARKETS

2024-10-09 _markets2

NEXT UP

  • FOMC Meeting Minutes will be released at 2:00 PM Wall Street Time. Don’t miss this!
  • Fed speakers: Bostic, Logan, Goolsbee, Jefferson, Collins, and Daly.

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