It’s becoming increasingly clear that the only thing backing the current ‘melt-up’ in the broader market is corporate earnings. U.S. equities were rattled on Tuesday by rising Treasury yields. Those yields are at their highest levels in almost four years — and starting to threaten the 3% level at which they become a threat to stocks. The Fed did hold rates steady on Wednesday, but hikes are coming, with traders pricing in a move no later than March.
So far, corporate earnings have been more than enough to offset any interest rates concern. After all, the S&P 500 rose 5.5% in January. Tax reform has helped many companies boost 2018 expectations and their share prices. But as earnings season winds down, the focus may return to wider valuation concerns, and the long-due correction in stocks may be at hand.
Before that comes however, there still are a few key earnings reports to watch next week. The upcoming batch likely won’t have the same market-wide impact, with key bellwethers in sectors like tech, financials and industrials largely having reported already. But for these three companies, earnings will be closely watched, for different reasons.
While this group is unlikely to move the market as a whole, all three stocks could see big moves after earnings next week.
Earnings Reports to Watch: Snap
Earnings Report Date: Tuesday, February 6, after market close
Snap Inc (NYSE:SNAP) heads into its fourth-quarter report in the midst of yet another pullback. SNAP has pulled back ~13% since clearing $16 in mid-December, which means the company needs a strong earnings report to reverse the trend.
I remain highly skeptical that strength will be seen — at least not on Tuesday. The consensus Wall Street target price of $12.36 is 11% below the current SNAP share price. User growth has disappointed going back to last year’s fourth-quarter — even before the company’s IPO — and there’s little evidence to see the trend changing.
As I argued back in November, CEO Evan Spiegel simply needs to change the narrative surrounding SNAP stock. But it’s hard to see how exactly that can happen. The amateur-hour description of Snap as a “camera company” fortunately seems to have been forgotten. But with Facebook Inc (NASDAQ:FB) unit Instagram copying all of Snap’s key features, and user growth tepid, the social media case for SNAP stock doesn’t seem much stronger.
Snap will have an opportunity to strengthen that case — particularly if it can show some acceleration in user growth during Q4. But with the company still unprofitable and still valued at almost $15 billion, it will take a huge quarter to move SNAP stock.
Earnings Reports to Watch: Tesla (TSLA)
Earnings Report Date: Wednesday, February 7, after market close
I doubt Q4 earnings from Tesla Inc (NASDAQ:TSLA) will change too many investors’ minds. TSLA has become a pure battleground stock; bulls and bears both are firmly dug in.
As a result, Tesla stock actually has been relatively range-bound over the past nine months — albeit across a wide range. But the stock has strengthened so far this year, gaining 12% as investors forgive early production hiccups with the Model 3.
That seems to set up potential gains coming out of Wednesday’s report. The bad news on production already has been released, and expectations are low. Tesla should have at least better news on that front, and CEO Elon Musk will be able to promise increasing production as the year goes on. Demand for the company’s bonds and now asset-backed securities shows many institutional investors still believe in the long-term story.
But that story will take years — not quarters — to play out. Q4 will give a small clue as to where Tesla is headed; one side may claim a short-lived victory. The battle over TSLA will continue to rage on.
Earnings Reports to Watch: Disney (DIS)
Earnings Report Date: Tuesday, February 6, after market close
Speaking of rangebound, Walt Disney Co (NYSE:DIS) stock has been running in place for about three years now. The culprit is worries about the company’s key ESPN unit. While consumers know the studio and theme park businesses, 47% of operating profit in fiscal 2017 came from the company’s Media Networks segment — primarily ESPN.
That business will likely be the focus of Disney’s fiscal Q1 report on Tuesday. That’s equally likely to be bad news for Disney stock. Weakness at the media properties and disconcerting declines in ESPN subscribers have weighed on DIS stock after recent earnings. With NFL ratings declining and cord-cutting accelerating, Tuesday may not be much different.
On the plus side, Disney will have some contribution from Star Wars: The Last Jedi. The Parks segment is performing well. And the acquisition of assets from Twenty-First Century Fox Inc (NASDAQ:FOX, NASDAQ:FOXA) should contribute to earnings as 2018 rolls on. But if ESPN overshadows those positives — as it has in recent reports — Disney stock will struggle.
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.
