This Market Needs the FAANGs to Perform, Or Else..: Taking Stock

(Bloomberg) -- Stock futures are off highs with 10-year yields charging ever so closer to that 3% mark (peaked at 2.9957%). Commodities look mixed, with aluminum gaining more than 1% and Brent crude slipping back below $74 per barrel.

News flow was pretty light over the weekend, with focus remaining on any incremental shifts in the China trade situation (China now welcoming a visit from Mnuchin), Trump postponing his Thursday speech on drug prices to a later date, some M&A shifts (another utility deal in Vectren/CenterPoint Energy and the collapse of the $4.3 billion Akorn/Fresenius deal), and earnings, with UBS getting whacked in Zurich, Philips rallying in Amsterdam, and a likely ugly day for toy maker Hasbro.

This might be the week that we break above 3% on the 10-year, but the question is whether this level still matters for market psyche, and if it does, will it offset any strong results that come out of this extremely heavy week of earnings?

Here’s what we’ve learned about earnings so far: Banks had mostly solid results, but rallies were quickly sold (more on this below); semis got off to a rocky start and it went from bad to worse once Taiwan Semi hit; consumer staples were an absolute disaster after a horrific reaction to PM and PG earnings (plunging 17% and nearly 6% in two days, respectively); industrials have acted well with some decisive gains (like CSX, TXT, and, to a lesser extent, HON) as well as relief rallies in GE and JBHT after very low expectations.

Keep an eye on the consumer staples horror show as KMB is on tap to report later this morning while KO hits Tuesday. Also industrials will remain in focus with UTX, MMM, CAT and LMT all releasing numbers tomorrow morning. And large-cap tech rolls on with GOOGL tonight and chip stocks TXN and TER Tuesday night.

Could FAANGs Break Down Like the Semis?

We started last week with a Netflix blowout followed by a massive breakdown in the semis, and now its the rest of the FAANGs’ turn to dictate whether tech as a whole goes higher or lower from here: GOOGL reports after the bell followed by FB on Wednesday and AMZN on Thursday (also MSFT, TWTR and BIDU report this week).

But the fact that traders are looking for excuses to sell the winners of the bull market (tech and financials), like the pounding that the semis took and the recent profit-taking in the banks, continues to linger. So it’ll be interesting to see how the market reacts to any whisper misses or negative color from any of the names mentioned above, especially given swirling concerns over rising costs, ad spend growth, usage declines, regulation, you name it.

It’ll also be especially interesting to see how the group fares considering that all FAANGs ex-Apple benefited last week from the redirection of flows out of the chip stocks: SOX -4.4% vs AMZN +6.8%, NFLX +5.2%, GOOGL +4%, FB +1.1%.

Can Apple Stay Afloat?

Apple is the clear outlier among the FAANGs, with shares tumbling almost 7% in the last two days thanks to Taiwan Semi’s disappointing forecast, with the firm blaming a "very high-end smartphone" for some of the softness. The road may not get easier for Apple, given that it’s the last of the complex to report, thus allowing the sell-side to wave the caution flag for seven more trading days prior to the print.

We’ve already seen some of this lately, with the most crushing take come from long-time bull Morgan Stanley’s Katy Huberty, who hasn’t wavered from her recommendation to buy the stock for almost nine years but is concerned ahead of the May 1 results -- "We forecast in-line March Q but see downside to June consensus estimates following iPhone build cuts and weak China data" -- Huberty was a definite factor in Friday’s shellacking, but it is important to note that she did hold pat on her long-term bull thesis, telling investors to buy any dip related to earnings.

Aside from Huberty, we also saw cautious notes from another uber-bull in Canaccord Genuity’s T. Michael Walkley -- "Survey work indicates slow iPhone sales ahead of new product launches" -- as well as Mizuho, Nomura Instinet, and OTR Global over the past week. Apple has well north of 40 analysts covering it, so expect more of the same in the interim.

That said, the technical chartists might view the name differently after the selloff, as the stock closed a hair above its 200-day moving average of $165.52 (Apple hasn’t been near its 200-DMA in years aside from the freak volatility-fueled meltdown in the markets back in February) and is now testing near-term support at ~$165, a level that it successfully bounced off of a few weeks ago.

This Market Needs the FAANGs to Perform, Or Else..: Taking Stock

What Strategists Are Saying

  • Morgan Stanley’s Michael Wilson: Remains tactically bullish with upside in S&P 500 to 2,950 in the near term; recommends selling semiconductor stocks and doubles down on consumer discretionary underweight; still has high conviction in energy stocks for 2018 and sees financials reasserting leadership with the rise in the 10-year yields
  • JPMorgan’s Mislav Matejka: 1Q earnings season will boost the global stock market; revenue growth is “rather healthy” and near the highest in years in the U.S. and Europe, which suggests EPS increases might become more sustainable
  • JPMorgan’s Nikolaos Panigirtzoglou: The rally in oil should create a positive flow in equity markets this year via increased sovereign wealth fund accumulation and buybacks by oil companies, though this flow is "of secondary importance as it is outweighed in size by either retail or institutional investor equity flows, both of which have been exhibiting a rather cautious stance this year"
  • Fundstrat’s Tom Lee, from Friday before the open: Part of the recent weakness in stocks may be that the 10-year is approaching 3%, which the Street sees as a headwind, but "we believe key level is 4%"; markets are in "risk-on" mode and multiple factors support a further rally from here

Notes From the Sell Side

The biggest calls so far... Citi upgrading CAT to buy ahead of earnings tomorrow morning, citing positive estimate revisions, increased capital returns and improving China macro data points; Goldman seeing an attractive entry point in the banks (specifically BAC and WFC) after recent weakness in the group due to the flattening of the yield curve; Goldman also upgrading MRK to buy and adding it to the conviction list on Keytruda success.

And yet, the most influential call out there may not come from the buy side or sell side today, but rather Kanye West, whose 14.6 million followers on Twitter received a few pearls of wisdom this morning, like this one: "I really love my Tesla. I’m in the future. Thank you Elon." I guess we’ll see if Kanye can do to TSLA, currently up 0.8% pre-market, what Kylie Jenner did to SNAP, but in reverse (no pun intended).

Tick-by Tick Guide to Today’s Actionable Events

  • Today -- CRU World Aluminum Conference kicks off
  • Today -- FDA panel for LLY and INCY’s baricitinib
  • 7:30am -- KMB, LECO earnings
  • 8:00am -- LII earnings
  • 8:30am -- Chicago Fed
  • 8:30am -- HAS earnings call
  • 9:00am -- HAL earnings call
  • 9:15am -- Next Wave Sohn (speakers from Oaktree Capital, EcoR1 Capital, others)
  • 9:45am -- Markit PMI
  • 10:00am -- Existing Home Sales
  • 10:00am -- KMB earnings call
  • 12:05pm -- Long Pond Capital’s John Khoury at Sohn Conference
  • 12:45pm -- DoubleLine’s Jeffrey Gundlach at Sohn
  • 2:45pm -- Sachem Head’s Scott Ferguson at Sohn
  • 4:01pm -- CNI earnings
  • 4:02pm -- GOOGL earnings (roughly)
  • 4:05pm -- CDNS earnings
  • 4:20pm -- FE earnings
  • 4:30pm -- WHR, SLM earnings; GOOGL earnings call
  • 4:40pm -- Glenview Capital’s Larry Robbins at Sohn
  • 5:00pm -- Senate committee to weigh Pompeo nomination
  • 5:10pm -- ABX earnings (roughly)
  • 5:35pm -- Greenlight Capital’s David Einhorn at Sohn

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