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Earnings season has arrived at an interesting time. U.S. stocks are soaring: the S&P 500 cleared 3,000 for the first time this week. And the most recent leg of the rally has come with little help from earnings reports. In a sense, the market has driven this rally on its own.
The irony is that many observers — myself included — fretted that the market might do the opposite. U.S. corporate earnings have been solid for some time. Of late, most everything else — trade war concerns, Brexit, slowing growth elsewhere in the world — has seemed a potential risk to the bull market.
And so this earnings season should be quite interesting. Will more strong earnings reports push the market even higher? Or have expectations moved too far? Investors can begin to get an idea next week.
One of the market’s largest growth stocks will test the market’s appetite for high valuation. Several key financial institutions will provide an update on the health of the U.S. consumer. And the world’s most valuable company will try to break a long-running curse. Next week’s earnings probably can’t break the rally on their own — but we’ll get some clues as to whether investors are getting ready to take profits.
JPMorgan Chase (JPM)
Earnings Report Date: Tuesday, July 16, before market open
JPMorgan Chase (NYSE:JPM) isn’t the first big bank to report second quarter earnings. That honor goes to Citigroup (NYSE:C), who reports on Monday morning. They’ll be joined by other financial giants: Wells Fargo (NYSE:WFC) and Goldman Sachs (NYSE:GS) on Tuesday and followed by Bank of America (NYSE:BAC) on Wednesday and Morgan Stanley (NYSE:MS) on Thursday.
Of that group, JPMorgan Chase earnings might be the most interesting to investors who don’t own JPM stock. That bank probably is executing the best out of any of the U.S. majors (though BofA is likely a close second). It’s posted several huge earnings beats in recent quarters — yet that’s done little for JPM stock. Indeed, shares have traded pretty much sideways since the beginning of 2018 (and the same is true for BAC and C).
So there’s two key questions here. Is the economic backdrop still as positive for JPMorgan Chase as it’s been for the past 2-3 years? And if so, will investors finally give JPM, and other bank stocks, some credit? Over the past 20 months, most banks have grown earnings — and investors simply have compressed their earnings multiples. For the group to break out, that has to change – and JPMorgan Chase earnings likely will give the best read as to whether that might actually happen.
Earnings Report Date: Wednesday, July 17, after market close
As I wrote this week, second-quarter earnings look hugely important for Netflix (NASDAQ:NFLX). NFLX stock is trying to break through resistance. Guidance for the quarter disappointed; investors will be looking for better-than-expected numbers, particularly on the subscriber front. And Disney (NYSE:DIS) and AT&T (NYSE:T) are launching their own streaming services.
But Netflix earnings also are important for the market as a whole. NFLX stock, after all, in many ways is an argument about valuation. In a market where valuations are at historic highs, it will be interesting to see how investors react to even a strong quarter. If Netflix does outperform guidance, and NFLX stock drops anyway, it could be a sign that, finally, valuation is starting to matter. After the last few months, however, that likely would be a surprise.
Earnings Report Date: Thursday, July 18, after market close
Earnings from Microsoft (NASDAQ:MSFT) will be important too, if for different reasons. From a simplistic standpoint, Microsoft is the market’s most valuable company at the moment. Its trading on Friday will literally move markets, including the Dow Jones Industrial Average.
But Microsoft stock, like Netflix, is interesting from a valuation standpoint, if in a different way. The question for NFLX is what investors are willing to pay for growth. The question with a stock like MSFT is what those same investors will pay for quality. Can the earnings multiple assigned MSFT stock keep moving higher? If it can, the same may be true for the rest of the market — and that would mean that the big rally so far this year can last through earnings season, and beyond.
As of this writing, Vince Martin has no positions in any securities mentioned.