Earnings season ramps up next week — and at a key time. Broad markets are near all-time highs. Volatility is at an all-time low. Treasury yields are creeping up, with the 10-year at its highest level in almost a year. Add to that a potential government shutdown this weekend, and it’s not hard to see equity markets becoming rattled — or at least more cautious.
Those external factors only add to the importance of the coming earnings season. At these levels, outside catalysts for the markets are difficult to find. For the market to continue its rally, corporate earnings have to show the way.
In that context, three of next week’s reports look particularly key.
An industrial giant will try and reverse a long slide — and prove that there’s still some value to be found in this market. Results from one of the so-called ‘FANG stocks‘ will test the market’s sentiment toward tech high-flyers. And a communications giant will try and settle investor fears in that important sector.
All three reports will be key for the individual stocks — and for the market as a whole. These bellwethers could signal reasons for caution — or provide confidence that what is now a 14-month rally will continue as 2018 rolls on.
Here are the 3 earnings reports to watch next week.
Earnings Reports to Watch: Netflix, Inc. (NFLX)
Netflix, Inc. (NASDAQ:NFLX) isnt cheap by any measure. But that doesn’t mean the stock isn’t a buy.
As I argued when I recommended NFLX stock back in July, costs admittedly are a concern. But NFLX is a sentiment play — and sentiment continues to be exceedingly positive. The Street is focused on subscriber growth above all else. And on that front, Netflix is delivering the goods. Notably, international subscribers now exceed the domestic total and should drive growth for years to come.
It’s unlikely that the Netflix’s fourth-quarter earnings release on Monday afternoon changes the argument much, if at all. I’d expect continued strength in subscriber growth — and continued cash burn, as Netflix funds the upfront cost needed to create its massive amount of original programming. Both NFLX bulls and bears likely will see the report as confirming their respective cases.
Perhaps more interesting than the numbers themselves will be the market’s reaction. Ahead of full-year reports from other tech giants like Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL), Netflix’s Q4 provides an important psychological test. If the numbers beat, but NFLX stock falls, that could be a sign that investors are paying more attention to value than to growth. That in turn could raise some concern for the highly valued tech plays whose Q4 reports will follow.
Earnings Reports to Watch: General Electric
It’s possible that no company reporting this week — or this month — needs a big quarter more than General Electric Company (NYSE:GE).
The stock has been in outright free-fall for close to a year now. It’s lost 46% of its value in the last twelve months, and was far and away the worst-performing component of the Dow Jones Industrial Average in 2017. A brief rally as the year started was undercut by the disclosure of a $6 billion charge in the company’s long-term case reinsurance business.
But I still believe there’s value in GE stock. Optimism toward a potential breakup has dimmed in the wake of the reinsurance issues, but GE will have options to unlock value as 2018 goes on. The leadership ranks should be refreshed under new CEO John Flannery. In fact, one of my 18 predictions for 2018 delivered to Breakout Stocks subscribers is that GE stock will rise 50% this year, thanks to those drivers.
For GE to rebound this year, it needs to post a strong showing with its Q4 report on Wednesday morning. And that’s not necessarily in terms of the numbers. Rather, GE needs to start rebuilding the confidence of investors — and Wall Street, which has turned on the stock with a vengeance.
That’s what makes this an important earnings report to watch.
The post-Q4 commentary isn’t going to focus on an earnings miss or beat. It’s going to focus on the plan going forward, and what General Electric is going to do to convince investors there isn’t yet another shoe waiting to drop. GE stock has real potential, as bad as things look right now. It needs to take the first step toward realizing that potential on Wednesday.
Earnings Reports to Watch: Comcast
The last of my 3 earnings reports to watch next week is Comcast Corporation (NASDAQ:CMCSA).
There’s one number that investors will focus on in the fourth-quarter release from the communications giant: video subscribers. The impact of ‘cord-cutting’ on Comcast earnings is one of the biggest risks to CMCSA stock. Back in September, a warning in terms of video subscriber declines sent CMCSA stock down 6% in a single day.
Comcast stock since has recovered those losses — and Wednesday morning’s report looks potentially dangerous for exactly that reason. The rally into earnings could reverse quickly if video subscribers disappoint again. And given the accelerated pace of cord-cutting another steep decline seems potentially likely.
Obviously, Comcast can recapture some of the lost revenue from video subscriber losses through broadband access fees. But the trend still provides a headwind to growth going forward, and a 19x forward P/E multiple doesn’t exactly scream value. Resistance twice has held around $42 for CMCSA in the last year — I’d expect it will do the same next week.
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.