Trade tensions on a continual uptick for months, yesterday, we finally saw an abatement to some extent. It was the European Commission’s President, Jean-Claude Juncker, arriving at the White House, talking business and reaching mutual ground with his heretofore U.S. nemesis that sent markets climbing late in the trading session. Having prior called the EU, a long-time ally, a trading “foe,” Trump seemed to step back yesterday, the two powers reaching an agreement to not impose additional tariffs in the negotiating stage. Trump touted a “close relationship” shared by the U.S. and the EU, noting that the two will uphold “strong trade relations.” Likewise, the U.S. President stated that the two will “work together toward zero tariffs, zero non-tariff barriers, zero subsidies on non auto-industrial goods.” The U.S. and the EU, similarly reached a deal to reduce industrial tariffs on both sides of the Atlantic. The Wall Street Journal also underscored that an agreement was being worked on to avoid tariffs on European cars.
Weighing in on yesterday’s progress in the White House summit, LPL Financial senior market strategist, Ryan Detrick, stated, “With the economy picking up steam thanks to the benefits of fiscal policy, this is one more worry that was holding back stocks out of the way. Investors can now focus on what should be a very strong corporate earnings season.”
With that said, on the earnings front, things have been rather sanguine, the trade war less palpably felt. Slightly fewer than one-third of S&P 500 companies have reported, their earnings up a spectacular 20%.
Market Summary: All of the major indexes ended up, the blue-chip Dow tacking on 0.68%, with the S&P 500 showing very strong gains of 0.91%. The tech-leaning NASDAQ outperformed the other major indexes, climbing 1.17%. The strong gains on the S&P 500 officially took it out of correction territory. A fall from a recent high of 10%, the index had entered correction territory on February 8th. The corrective phase over, yesterday the move of correction territory was done with flying colors, 10 of the index’s 11 sectors ending higher. Telecom was off 2.9%, tech surging 1.5%.
One of the noteworthy stocks in yesterday’s trading was Boeing (BA), a major component on the price-weighted Dow. Though the airline company’s revenues and earnings beat expectations, and it raised its 2018 revenue outlook, shares were off 0.7%, climbing back from steeper losses earlier in the trading day. The reason for the losses: its commercial airplane division came up short on sales, missing the market’s consensus.
General Motors (GM) was another company that got clobbered. Though posting higher profits, it lowered its outlook due to steel and aluminum costs. The company’s quarterly commodity costs rose $300 million – and to make matters worse, it noted that it expects there to be continued commodity pressure. Though certainly a value buy, the company has seen a dour change in fortunes, with raw materials costs significantly higher than when it shared its earnings guidance at the beginning of the year. Facing higher commodity prices, though more than the tip of the iceberg, was not the only stressor the company faced, currency devaluation in Argentina and Brazil also weighing on its bottom line. Combined, the two headwinds, have resulted in a hit of about $1 billion. GM lowered its earnings forecast from a range of $6.30-$6.60 to $6. Analysts had forecasted that earnings would be lowered to $6.41. Shares, in early trading, fell to $37. In a client note, analysts at Jefferies stated, “While we were expecting an end to earnings resilience, this is slightly worse than feared.” Initially, GM had forecasted that this year’s bottom line would be in keeping with last year’s.
A few factors are at play here. U.S. carmakers have benefitted from a shift to larger, more profitable pickup trucks and utility vehicles. Contextually, though, given that steel and aluminum constitute such a large percentage of car components – steel, approximately 53%, and aluminum, some 11%, – the Trump imposed tariffs are being felt. And even though most of GM’s steel comes from domestic producers, steel prices have been on the uptick in the U.S. after the 25% tariffs the Trump administration announced in May. General Motors, though, is a stock you should watch very actively. According to the NASDAQ (nasdaq.com), its estimated PE is at 5.89, extremely low for a company that’s been at the forefront of the electric car revolution. This is a company that scored a huge deal with SoftBank not long ago and that had heretofore, done better than any other large U.S. car company in weathering the Trump-inspired trade war. Eye this stock carefully; we could very well see corrective elements in today’s movement. At a dividend yield (TTM) of some 4%, with solid earnings growth, the company will be in our sights for some time.
Facebook (FB) is another company that was in center-stage, plummeting like few tech powerhouses have in recent years. The social networking giant nosedived over 20% in after-hours trading, something more typical for fly-by-night companies. Like we’ve said time in and time out, if any factor of the trifecta is off – from revenues to earnings to forward guidance – a stock can get the wind knocked out of it like a boxer in a ring. The company beat on the earnings front but revenues came out just shy of expectations ($13.23 billion as opposed to expectations of $13.36 billion) and that – coupled with guidance for weaker revenue in the second half of the year – and the company saw the floor pulled out from beneath it.
In a nutshell, the market has been unforgiving, high expectations already baked in. If not for the ongoing trade war, things could be different, but with little margin for error and the assumption that the trade war with China might get worse, the feeling is that companies could be very vulnerable. Look, more than anything for earnings guidance. On the upside and downside, when projections veer from expectations – even marginally – we could see strong waves, prime time for opportunistic, intelligent traders.
Economic Calendar: Today’s calendar will be jam-packed, with weekly jobless claims, durable goods orders, core capital equipment orders and advanced trade in goods all coming out at 8:30. Then, at 10:00, housing vacancies numbers will be released. Tomorrow, Q2 GDP numbers will be released, expectations sharply rising throughout the quarter.
Hot Stocks: ARNC, MHK, MAT, GILD, FB, QCOM, F
IPOs: JG, BRY
Have a great trading day!