As a baseball fan, this is the time of year when I look forward to the days when pitchers and catchers report to spring training. As a trader and strategist, I also have to look forward to the days when major companies report their earnings. There are 24 days until the first spring training camp opened; there are 5 days until Apple reports its 4th quarter and full year 2020 results.
Banks are the pitchers and catchers of the S&P 500 Index (SPX). While companies can and do report earnings more or less anytime, releases by JPMorgan Chase (JPM), Wells Fargo (WFC) and Citigroup (C) marked the unofficial start of this quarter’s deluge. Other major financial firms followed shortly thereafter. There is no obvious significance to these companies acting as the market’s forefront – for years traders used Motorola (MOT) and Alcoa (AA) to kick off earnings season. The relative importance of those stocks has diminished, however, and neither tends to report earnings early after both underwent corporate reorganizations.
There is an unfortunate feature to having banks kick of the quarter. As I noted earlier this week, bank and brokerage analysts tend to be a more prickly and unforgiving bunch than their tech counterparts. Most of the major banks and brokers reported excellent quarters, only to find their stocks trading lower. The culprit was trading profit – a common bogeyman for bank earnings. No matter how much a bank’s traders add to the bottom line or how regularly they do so, their contributions are typically considered to be transitory. It is difficult to model trading performance from quarter to quarter, so it is routinely discounted as inferior.
This morning, a Bloomberg report noted that of the 47 companies that had posted earnings so far, those that exceeded EPS expectations underperformed SPX by 1.7% and those who missed the market outperformed by 1.3%. That is completely the opposite of what one might expect. Part of that conundrum can be explained by the predominance of banks among those 47 companies, and part can be explained by the stellar performance of Netflix (NFLX). The streaming giant missed its GAAP earnings expectations by a wide margin but reported stunning subscriber growth. That subscriber growth is the polar opposite of trading profits – analysts can immediately plug those numbers into their models and use them to project the associated revenues into the future.
When stocks sport high historical valuations, as they currently do, their margin for error is quite slight. IBM is down over 13% thanks to yet another revenue shortfall. Yet that is unfortunately unsurprising. The former market behemoth has disappointed investors for many prior quarters, and the stock sports a below average P/E to match. The lesson that can guide the current market is one of historical significance. IBM used to dominate markets in a way that Apple (AAPL), Microsoft (MSFT) and Amazon (AMZN) do now. It should remind investors that no company is immune from commercial pressures, and that seemingly unassailable companies can get overtaken.
In that vein, the 8.5% drop in Intel (INTC) was even more instructive. Like IBM, INTC was a market giant, dominating the semiconductor industry in the way that IBM dominated computers. INTC has relatively languished as flashier competitors surpassed it, and investors became inured to earnings disappointments. Last week, the stock surged when the board decided to replace its CEO. It then surged further yesterday afternoon when earnings were accidentally released prior to the market’s close. Investors had a newfound allure for this prior laggard. That was to be short-lived, however, when the new CEO announced that the company would continue to manufacture its own chips rather than outsourcing them. The stock has managed to retain all its gains since the CEO announcement, but quickly gave back any subsequent enthusiasm.
Two Week Hourly Chart of INTC
Source: Interactive Brokers
The vast majority of SPX has yet to release their earnings. Most are expected within the coming two weeks. If there is anything that we have learned so far, that is to expect the unexpected. We should all be highly cognizant of upcoming earnings release dates for our holdings and monitor those risks accordingly.
Disclosure: Interactive Brokers
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