Beat After Beat Launches Markets to Higher Ground: Taking Stock

Arie Shapira

25 Jul 2018, 04:04 AM IST

(Bloomberg) -- S&P 500 futures are climbing and poised to test the highs from last week, following strength in Europe (Stoxx 600 +0.9% on a bevy of well-received earnings reports) and China (Shanghai composite +1.6% on stimulus news).

But the main reason has to be that the seemingly unsustainable rate of EPS beats from last week is looking somewhat sustainable, at least to start the heavy deluge of earnings this week: Alphabet, United Tech, Lilly, Biogen, UBS, and so on..

Of the 104 companies in the S&P 500 that have already released results, 90% have reported earnings beats, keeping up with the 94% rate that we saw on Friday. Tech is now a perfect 14 for 14 while numbers from the financials and industrials sectors have also come in impressively against the expectations.

Kicking Into High Gear

Volumes were pretty anemic on Monday (lowest on the consolidated tape in a week), though that’s to be expected as we’re just now starting to kick into high gear on earnings, with Alphabet last night, multiple industrial heavyweights today (United Tech, 3M, Lockheed Martin), the telecom majors in AT&T and Verizon as well as Texas Instruments, though the chip giant pre-announced quarterly numbers last week.

Given the weak volumes, there isn’t a whole lot to take away from Monday’s session besides the fact that 1) 2,800 is holding like super glue, and 2) financials continue to exhibit strength off of their recent results. The BKX is now up >6% since JPMorgan kicked off earnings for the group over a week ago, far outpacing the S&P 500’s slight uptick of 0.3% -- note UBS is up ~3.5% in Zurich on a profit beat.

Tech as a whole turned in a fine day considering early weakness in the FAANGs -- Alphabet’s 4.5% gain should make some of the momentum bears pipe down, but that’s unlikely to happen until the last of the FAANGs reports (Facebook and Amazon are back-to-back on Wednesday and Thursday while Apple is around the corner) -- and the semis, which got whacked early on by a Morgan Stanley note about tariff impact.

NXP Semi closed ~18% below Qualcomm’s cash offer of $127.50, just two days before the July 25 judgment day for the $43 billion merger, so it’s no wonder that the sell-side rancor is percolating as this M&A saga draws to a close. Deutsche Bank yesterday gave an initial $90-per-share deal break scenario for NXP Semi, which would be a sizable blowup for the risk arbitrage world. Mizuho now says its arb desk sees an ~22% probability of the deal happening, and is factoring in a break barring an eleventh-hour approval.

And for all the FAANGsters (bulls, bears, enthusiasts, etc.), here’s a recap of the Netflix TOPLive Bull Vs Bear battle between BTIG’s Richard Greenfield and Wedbush’s Michael Pachter, where the analysts went toe-to-toe on the topics of cash burn, competition, subscriber growth forecasts, price hikes, the risk/reward for Netflix’s stock over the next three months, and the outlook for the rest of the FAANG complex. Click here for a full transcript of the hour-long debate.

Sectors that may outperform today:

FAANG stocks, especially Amazon and Facebook (as Netflix already reported), with Alphabet poised to open at a record and the sell-side loving every minute of it, considering 36 of the 41 analysts covering the stock have a buy rating and no one has a sell
Semis after a strong showing from Swiss chip stock AMS AG, which surged as much as 13% in Zurich at one point today (see Street Wrap) on strong guidance, helping ease concerns around the Apple supply chain
Industrials as United Tech gaps ~2.5% in early trading on a beat and raise
Healthcare after both Eli Lilly and Biogen are indicated higher on better-than-expected numbers
Autos after Peugeot soars 13% in Paris to a seven-year high on strong results (see Street Wrap)
Steels after Steel Dynamics rose 2.5% on a stronger print than what we got out of Nucor last week, plus the latter got an upgrade from Keybanc overnight
Oil service robotics-exposed companies like Oceaneering may get a lift after Helix Energy, a competitor in the space, surged almost 9% on a revenue beat that topped the highest estimate on the Street thanks partly to improvement in Robotics

Sectors that may underperform today:

Appliance names, like Electrolux (-1.6% in Stockholm), and perhaps some of the hardline retailers, after Whirlpool sank >9% on a dreadful earnings forecast; the company blamed lower global revenue growth, increased expectations for global cost inflation and weaker EMEA performance
Packaging stocks as Owens-Illinois followed Crown Holdings with disappointing guidance
Pressure pumpers, like ProPetro, Keane Group, and Liberty Oilfield, after Goldman sharply slashes estimates and price targets on virtually any service stock with exposure to U.S. completions

Notes From the Sell Side
Morgan Stanley’s Katy Huberty, an influential name on Apple, expects an in-line quarter for the company and a slightly weaker-than-expected September quarter outlook due to a one-month delay in mass production of the 6.1" LCD iPhone due to LED backlight leakage; while the guidance comments may get the most attention, it’s worth noting that she is lifting her price target on overweight-rated Apple to $232, which is just a few bucks below the highest target on the Street.
Bernstein strategist Inigo Fraser Jenkins published a big note titled "Amazon’s Threat to Asset Managers," asking whether big tech might be interested in entering asset management. He concludes that "distributing funds could be attractive but not "actively" managing strategies themselves.
Mizuho’s Paul Sankey, formerly of Wolfe Research, initiated on exploration and production stocks after his recent launch of four oil mega-caps; he argues that the group is in its "best shape in a generation" and names EOG top pick, dubbing it "The AAPL of Oil"
BofAML double upgrades MOS to buy on a sustainable cyclical recovery in phosphate and double downgrades GIL to underperform on incremental costs and intensified civil unrest in Nicaragua. and one of GOGO’s biggest bulls, Raymond James, has thrown in the towel on a buy rating, citing continued turbulence over the next several quarters.

Tick-by-Tick Guide to Today’s Actionable Events

Today -- IPO lockup expiry: MNLO, EYEN, GTES
7:00am -- IPG, SHW earnings
7:30am -- MMM, LMT, HUBB, JBLU, KMB, VZ, ATI earnings
7:40am -- CVLT earnings
8:00am -- PCAR, BTU earnings
8:00am -- WHR, BIIB earnings calls
8:30am -- UTX, VZ earnings calls
9:00am -- FHFA House Price Index
9:00am -- MMM, HOG, LLY earnings calls
9:45am -- Markit PMIs
9:45am -- Markit PMIs
10:00am -- Richmond Fed
10:00am -- House subcommittee holds hearing on Strategic Petroleum Reserve
10:00am -- KMB earnings call
11:00am -- LMT earnings call
11:30am -- Trump addresses Veterans of Foreign Wars
11:30am -- Wilbur Ross speaks at Hudson Institute about commercial space efforts
1:00pm -- Treasury auction: $35b 2-year notes
4:01pm -- TXN, T (roughly), CNI, IRBT earnings
4:02pm -- TER earnings
4:05pm -- BHE, KN, MANH, CB, SYK, WYNN (roughly) earnings
4:10pm -- AMP, IPHI earnings
4:15pm -- RHI, TSS, RNR earnings
4:30pm -- API oil inventories
4:30pm -- MKSI, SLM earnings
4:30pm - TXN, T earnings calls
Tonight - IPOs scheduled to price: Bloom Energy (BE), Aquestive Therapeutics (AQST)

To contact the reporter on this story: Arie Shapira in New York at ashapira3@bloomberg.net

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Courtney Dentch