Earnings season finally has arrived — and not a moment too soon. A market increasingly concerned by external factors like Treasury yields, tariffs, political discord — now can focus on corporate earnings.
That should be good news. Tax reform is likely to lead to a number of impressive first-quarter reports. The economy remains strong. And yet stock valuations have come down of late, with the market trading at closer to 16X earnings against 18X not all that long ago.
The combination seems to set up a potential rally for the market over the next few weeks. But that will only be true if earnings are as strong as bulls expect. This coming week will give the first bit of evidence as to whether that will be the case.
These three earnings reports look particularly key — and particularly instructive. A big bank will give clues as to the health of the economy — and could lead to a rally in that key sector. A high-flying tech stock will test whether investors still are comfortable with steep valuations. And a healthcare giant will try and give that struggling sector some good news. It’s a big week for these three companies — and for the market as a whole.
3 Earnings Reports to Watch: Bank of America (BAC)
Earnings Report Date: April 16 before market open
This looks like a particularly key quarter for Bank of America Corp (NYSE:BAC). Expectations are high, with the Street looking for 44% year-over-year EPS growth. And everything should be going BofA’s way at the moment.
The installation of new FOMC Chair Jay Powell has raised expectations for multiple rate increase this year. One hike already happened last month; the market is pricing in two more, and possibly a third. The economic environment is strong. Tax reform is helping Bank of America’s earnings — and should help its customers as well. Even the current market volatility could help the company’s Merrill Lynch unit.
The risk here is that investors, and the Street, are fully aware of those tailwinds. In that context, even a strong quarter could be seen in some quarters as a disappointment. But with BAC stock rather choppy the last two months, and trading at under 11X 2019 EPS, it’s not as if investors are pricing in strong growth in the mid-term.
I’d expect BofA’s report to restore some confidence in BAC stock — and potentially in the market as a whole.
3 Earnings Reports to Watch: Netflix (NFLX)
Earnings Report Date: April 16, after market close
Recent history suggests it would be unwise to bet against Netflix, Inc. (NASDAQ:NFLX). NFLX stock nearly doubled last year; it’s up another 61% so far this year, with a Q4 earnings beat in January a major catalyst. Investors have ignored the company’s negative free cash flow and focused on its growth. In particular, the company’s opportunity internationally continues to drive investor optimism.
I’ve recommended NFLX stock for some time, most recently in July, on the back of that growth and positive analyst sentiment. But I’m interested to see how Netflix stock responds to Monday’s report. The stock has outrun even the Street, whose $287 average target price is 7% below the current price. Valuation obviously is extremely high, at 72X forward consensus EPS. And Netflix probably will have to go back to the debt markets at some point this year or next.
So for the market as a whole, investor reaction to Netflix earnings will be worth watching. Are investors still willing to pay up — and pay up big — for growth? If Netflix beats expectations, and Netflix stock still falls, it could be a sign that the market will be more cautious toward other growth stocks as earnings season rolls on.
3 Earnings Reports to Watch: Johnson & Johnson (JNJ)
Earnings Report Date: April 17, before market open
Johnson & Johnson (NYSE:JNJ) has an important report of its own on Tuesday morning — both for JNJ stock and for the healthcare space as a whole. Investors clearly are cautious toward the industry at the moment. Pharmacy stocks Walgreens Boots Alliance Inc (NASDAQ:WBA) and CVS Health Corp (NYSE:CVS) both are at multiyear lows. Major distributor Cardinal Health Inc (NYSE:CAH) isn’t far off. Drug giants Pfizer Inc. (NYSE:PFE) and Merck & Co., Inc. (NYSE:MRK) have badly underperformed a bull market over the past few years.
In that context, Johnson & Johnson actually has done a nice job. JNJ in fact hit an all-time high in January — but it sold off sharply as the broad market turned, dropping 15%. That sets up a Q1 report on Tuesday that could send J&J stock higher. Expectations aren’t terribly high, with the Street looking for 9% growth in both revenue and EPS. And those analysts still back the stock, with the average target price suggesting 15% upside.
A Q1 beat from Johnson & Johnson could re-establish confidence that the company can grind higher through a tough time for healthcare stocks. And it could help the sector as a whole. The irony of the sector’s recent performance is that historically healthcare stocks were seen as safe havens in volatile times. JNJ’s performance the past few months shows that is no longer the case.
A good quarter from Johnson & Johnson could go a long way toward restoring that narrative – for both the stock and its sector.
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.