Earnings season begins in earnest next week — and it feels like an important stretch for the market. Broad market indices have gained sharply since the election, but the political benefits that were supposed to help the market — tax cuts and deregulation most notably — haven’t arrived.
And yet, volatility is near a record low, while the overall market is at an all-time high.
That combination puts a lot of pressure on corporate earnings over the next couple of weeks. Big bank reports this week already have taken some of the juice out of a nice run in financials. Any additional weakness could do the same elsewhere.
These three companies reporting next week should give investors some insight as to how earnings season will play out in key sectors. Just as importantly, they will give an idea as to whether sentiment on the Street and in the market is enough to keep the bull run going — without any outside help.
Earnings Reports to Watch: Netflix (NFLX)
I’ve recommended shares of Netflix, Inc. (NASDAQ:NFLX) several times this year, most recently in July. Even with NFLX near all-time highs, I’m not ready to change my optimism toward the stock long-term.
But I’m intrigued as to how the stock will react to third-quarter earnings, due Monday after the close. NFLX stock, after all, is up 61% year-to-date. It’s trading just under $200, which shouldn’t matter from a fundamental standpoint — but might provide a temporary ceiling from a psychological perspective.
Expectations clearly are high heading into the report, given the strength in the stock, ever-increasing target prices on the Street and the company’s blowout Q2 report in July.
Investors will focus on subscriber counts here — but Netflix is going to have to post a huge number to push past the $200 mark for the first time.
More broadly, the report should also give some evidence as to investor sentiment around tech and the so-called “FANG stocks” in particular. Are investors more willing to take profits with the market at all-time highs? Or are there still investors willing to buy into NFLX and other tech high-flyers at these valuations? The response to Netflix earnings on Monday will shed some light on that question for not just Netflix stock, but other dearly valued high-growth names.
Earnings Reports to Watch: Verizon (VZ)
I called for a bottom in Verizon Communications Inc. (NYSE:VZ) back in early May. And though I was a bit early in the call, VZ stock indeed has bounced back, thanks in large part to a Q2 earnings report that confirmed the news wasn’t as dire as bears, and some Wall Street analysts, had suggested.
The Q3 report on Thursday morning, then, becomes an important one for Verizon. A profit warning from rival AT&T Inc. (NYSE:T) has again stoked fears of margin compression in the wireless communications sector. A weak report from Verizon on Thursday would make Q2 look like an exception, not the rule, and potentially change sentiment around the stock.
But regardless of what the Q3 numbers are, I still like Verizon as a long-term play. An annual dividend yield of roughly 4.9% will attract buyers, certainly until interest rates begin their long-awaited move higher. A forward P/E multiple under 13x prices in a lot of risks.
And the acquisitions of Yahoo! along with smaller names in the IoT (Internet of Things) space provide potential growth beyond the wireless business. Any post-earnings dip in Verizon stock, then, should be seen as a buying opportunity.
Earnings Reports to Watch: PayPal (PYPL)
I’m somewhat skeptical that PayPal Holdings Inc (NASDAQ:PYPL) earnings are going to do all that much for PYPL stock. PayPal has made a couple of small, positive, post-earnings moves this year on its way to record highs. But there’s a great deal of optimism toward the payments industry as a whole — Square Inc (NYSE:SQ) has more than doubled since February, for instance — which I don’t think a single earnings report from PayPal will impact.
But PayPal earnings also serve as a proxy for e-commerce growth overall. And a surprise in either direction could reverberate around the market. Investors in Amazon.com, Inc. (NASDAQ:AMZN), brick-and-mortar retailers like Macy’s Inc (NYSE:M) and J C Penney Company Inc (NYSE:JCP) and payment companies like Square, Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) will be watching closely.
In fact, a PayPal beat could do more to hurt offline retail stocks, in particular, than it would to help PYPL stock. PYPL already seems to be pricing better-than-consensus numbers on Thursday afternoon, and the long-term case remains intact. But if PayPal numbers show increasing e-commerce sales, old-line retailers could take another hit. And so PYPL shareholders won’t be the only investors looking closely at PayPal’s numbers.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.