Daily Markets: Growing Disconnect Between Market Rally And Earnings Prospects?

Today’s Big Picture

Equities in Asia closed the day on a mixed note with Japan’s Nikkei falling 0.4% while Hong Kong’s Hang Seng rose 1.1% and China’s Shanghai Composite finished the day 0.6% higher. By mid-day trading, European equities were down across the board while U.S. futures are showing red this morning, a rare event of late given the sharp claw back from March’s lows that led the S&P 500 to reclaim all of its year-to-date losses as of last night’s close and the Nasdaq Composite to hit new highs.  

A few weeks ago we shared our concern with readers that despite the improving sentiment as the global economy tries to put the pandemic in its rearview, the stock market was starting to get out over its ski tips. The reality is the global new daily cases just hit a new record high and only 20 states in the U.S. are seeing new daily cases declining. While we are hopeful about the prospects associated with the economic reopening, it is a phased approach and despite the incremental monetary stimulus announced by the Federal Reserve, several headwinds remain in place, especially when it comes to consumer spending - see today’s Data Download for more on that - and the global pandemic is far from over.

This likely means we are seeing a disconnect between the stock market rally and economic and earnings prospects. That disconnect is highlighted by several U.S. equity indices nearing in on prior record levels even though consensus EPS expectations for the S&P 500 calling for less than 1% EPS growth over the 2019-2021 time frame. In our view, investors becoming far more selective. We also think the upcoming June quarter earnings season will set the market tone for the coming months and we would not be surprised to see investors look to protect robust second-quarter gains associated with the market rebound before then.  

Data Download

Coronavirus

There are now over 7.2 million confirmed cases of the coronavirus worldwide and nearly 410,000 deaths. There was a time when that would have been a cause for major concern, but in 2020, anything less than an apocalypse in the coming week is reason to rally. Yesterday, the World Health Organization (WHO) reported there were a record 136,000 new cases of the coronavirus on Sunday, the most in any one day since the pandemic began.

The WHO also shocked the world yesterday by saying that asymptomatic spread of the coronavirus is very rare, a complete reversal of what we’ve previously been told. Apparently, there was some sort of misunderstanding between the WHO and the rest of the world over “pre-symptomatic,” meaning before showing any symptoms and “asymptomatic,” meaning having the virus, but never experiencing any symptoms. We guess folks have been too busy to clarify until yesterday. Interestingly, people with type O blood may be at a lower risk of infection, according to a study from 23andMe.  

Texas has sent a new record-high for COVID-19 hospitalizations after being among the first to relax its stay-at-home order. The rate for positive COVID-19 tests in Texas had reached a low of 4.3% around the end of May but has jumped back up to 7.6%.

Remember that aircraft carrier that had the virus running rampant? Turns out that 60% of the sailors on board have tested positive for antibodies - a far higher rate of infection than earlier data indicated. Most who tested positive for the virus were asymptomatic.

New Zealand has effectively eliminated the virus domestically, with no active cases currently, and is planning to lift nearly all restrictions aside from border controls. A total of 1,504 people were infected with at least 22 dying from COVID-19.

International Economy 

While the markets reach new highs, the economic data continues to point to record-breaking contractions.

• According to the World Bank, both emerging and developing economies will shrink this year for the first time in at least 60 years. As many as 100 million people will be tipped into extreme poverty, which is defined by income of less than $1.90 a day. Per capita, income is expected to shrink 3.6% globally.
• France’s central bank forecasts that output this year will contract 10%.
• Exports from Germany, Europe’s biggest economy, in April contracted the most on record with the data going back 70 years.
• Japan’s machinery orders fell the most in April in over ten years.

The third estimate for Eurozone GDP in Q1 came in at a 3.1% contraction. Q2 will be worse as the region's largest economies have been (and many continue to be) in some sort of lockdown or activity restriction through the end of Q2. 

Let the nationalizations begin! Hong Kong’s government is taking a stake in the airline Cathay Pacific (CPCAF) and hedge funds are considering leaving the territory. 

Domestic Economy

Yesterday the National Bureau of Economic Research officially announced that the U.S. entered into a recession starting in March, ending the 10-year and 8-month record-long period of economic expansion, beating out the prior record that ended March 2001 by 8 months. 

Today the NFIB Small Business Optimism Index rose to 94.4 in May from 90.9 in April versus expectations for a decline to 86. Sales expectations rose 18 points to -24 from a record low of -42. Compare this with the U.S. Chamber of Commerce reporting that 25% of small businesses have already shut down permanently. An AARP report found that 53% of households have no “emergency savings.” A Washington Post/University of Maryland poll found that 33% of respondents were comfortable entering a retail store and just 22% are willing to dine in a sit-in restaurant. A YouGov/CBS poll found that 71% have no intention of going to a bar or restaurant and 85% won’t get on an airplane, even if they could. 

Yesterday the Federal Reserve expanded its Main Street Lending program to help small and medium-sized businesses get support. This included lowering the minimum and raising the maximum loan limits, adjusting the repayment schedule to start after two years, and extending the term to five years. The Fed’s Open Market Committee is meeting today and tomorrow as it looks to transition from the emergency pandemic response into recession management.

Later today we will get the usual weekly Redbook retail sales report, the IBD/TIPP Economic Optimism report, Wholesale Inventories, JOLTs report, and the weekly API Crude oil stock report.

Markets

Naturally, the markets rallied on the news, with the Nasdaq Composite gaining 1.1% to reach a new all-time high. The S&P 500 rose 1.2% and is now back in the green for the year while the Dow was the strongest of the three, gaining 1.7% on the day, thanks to the continued strength of Boeing’s (BA) share price.

The reality is that the market sees that if we get this next round of fiscal and monetary stimulus, the total infusion will be $10 trillion for the entire year. That is likely enough to offset the loss of GDP for 2020 as a whole by somewhere in the area of four or five-to-one. Clearly, not all of that will get spent as households save more and stay home more, and most businesses will hold off on any expansion plans. That said, the policy stimulus will outpace the worst point of this recession and any possible lingering aftershocks. We’ll just ignore the drag on the economy in the future from the mountain of debt that all this is creating.

Stocks to Watch

HD Supply (HDS) reported better than expected April quarter results and shared its Preliminary Net sales in May were approximately $431 million, which represents a year-over-year average daily decline of approximately 7.3%.  

Jewelry retailer Signet Jewelers (SIG) reported EPS of -$1.59, $1.07 better than the -$2.66 consensus as revenue for the quarter fell 40.5% YoY. Signet declined to provide financial guidance given the uncertainty of the current environment.

Tiffany & Co. (TIF) missed April quarter EPS expectations as its worldwide net sales for the quarter fell 44.6% YoY to $555.5 million, widely missing the $653.97 million consensus. Per the company, its retail sales in Mainland China were down approximately 85% and 15% YoY during the first and second months of the quarter, but up approximately 30% YoY in April. That sequential strength continued with May retail sales in Mainland China up approximately 90% YoY despite global net sales being down approximately 40% YoY for the month.

Citing stronger growth in its US Consumer segment, lawn, and garden product company Scotts Miracle-Gro (SMG) upped its 2020 revenue and EPS forecast last night. The company now sees EPS in the range of $5.65-$5.85 vs. its prior guidance of $4.95-$5.15 and the $5.40 consensus. For its US Consumer segment, Scotts now forecasts growth of 9%-11% vs. its prior view of $1%-3%. "Consumer purchases of our products at our largest four retail partners were up 44 percent in May, and we are now up approximately 19% year-to-date at the time of this announcement.”

With just a few weeks left until we close out the current quarter, several companies have provided intra-quarter business updates:

• Wendy’s (WEN) shared U.S. comps improved to -1.9% in May from -14.0% in April. The company’s total May comps rose to -3.3% from April’s -15.3%. Total quarter to date comps are down 9.9% with the U.S. down 8.6%. Wendy’s also shared that its supply of beef has returned to near-normal levels.
• After falling 23% in April, Mastercard (MA) revealed its switched volume has seen week-over-week improvements since May 7 in part due to the relaxation of social distancing measures in several markets and the impact of fiscal stimulus in the US. The company noted greater improvement in certain discretionary categories such as clothing, gas, home improvement, restaurants, and domestic travel.
• Glass container product company O-I Glass (OI) shared quarter-to-date shipments were consistently down through mid-May but volume trends have gradually improved over the past few weeks as markets have begun to reopen. The company now sees its 2020 volumes to be down 5%-10%.
• Following a 20% YoY decline in April, roofing material distribution company Beacon Roofing Supply (BECN) said its daily sales in May decreased “only low-single digits compared to the prior year.”
• Macy’s (M) sees April quarter EPS of -$2.03, modestly ahead of the -$2.06 consensus forecast. The company commented its digital business continues to be strong and as of June 1 it has reopened roughly 450 stores, which are “performing better than anticipated.”
• Analytics and information solutions company Equifax (EFX) now sees current-quarter revenue in the range of $910-$930 million vs. the $859 million consensus. 

Tesla (TSLA) CEO Elon Musk announced that while the production of the company’s S, X, and 3 models is doing well, its Model Y is facing production and supply chain ramp challenges.

Bloomberg reports specialty retailer Tailored Brands (TLRD), the owner of Men’s Wearhouse and Jos. A. Bank, is considering a potential bankruptcy after the coronavirus lockdown kept America’s office workers at home, putting a damper on demand for new suits.

The Wall Street Journal reports oil and natural gas company California Resources Corp (CRC) skipped an interest payment to lenders and could file for bankruptcy as soon as next week

Beyond Meat (BYND) surged to its highest levels since September after reports emerged indicating that it will expand its presence in China through a partnership with food distributor Sinodis. 

IBM (IBM) CEO Arvind Krishna announced the company is exiting the facial recognition business following criticisms of racial and gender bias associated with the technology. 

Taiwan Semiconductor Manufacturing (TSM) has secured government subsidies for its $12 billion chip plant in Arizona that is expected to allay national security concerns and shift high-tech manufacturing to America.

Automobile retailer Vroom (VRM) priced an upsized IPO offering of 21.25 million shares at $22.00 per share, above the expected range of $18-20. VRM shares will begin trading on Nasdaq later today.

After today’s close investors, Chewy (CHWY), Five Below (FIVE), GameStop (GME) , and Verint Systems (VRNT)are slated to report their quarterly earnings. Investors that want to get a jump on those and other corporate earnings reports coming at us this week should visit Nasdaq’s earnings calendar page.

On the Horizon

• • • Dates to mark:
      • •  June 10: Federal Reserve Interest rate decision and Real Hourly Earnings
        • June 11:  May PPI
        • June 12: Michigan Consumer Sentiment Report, Import/Export Prices
        • June 15: Empire Fed Manufacturing
        • June 16: May US Retail Sales, May US Industrial Production, Capacity Utilization, Business Inventories
        • June 17: May US Housing Starts, Building Permits
        • June 18: Philly Fed Outlook
        • June 19: Options Expiration
        • June 22: Chicago Fed Activity, Existing Home Sales
        • June 23: Preliminary Markit PMIs, New Home Sales, Richmond Fed Manufacturing
        • June 25: Wholesale Inventories, GDP, Durable Goods, Kansas City Fed Activity
        • June 26: Personal Income, Personal Spending, PCE, Univ of Michigan Consumer Sentiment
        • June 29: Pending Home Sales, Dallas Fed Manufacturing
        • June 30: Case-Shiller Home Prices, MNI Chicago PMI, Consumer Confidence
        • July 1: ADP Employment Report, Markit Manufacturing PMI, Construction Spending, ISM Manufacturing, Wards Vehicle Sales
        • July 2: Nonfarm Payrolls, Unemployment Rate, Durable Goods, Capital Goods, Factory Orders 

Thought for the Day

“Stop being always available to people who are just there for you when it’s convenient for them.” ~Anonymous 

 Disclosures

• Beyond Meat (BYND), Tesla (TSLA) are constituents in the Tematica Research’s Cleaner Living Index. 
• IBM (IBM), Verint Systems (VRNT) are constituents in the Foxberry Tematica Research Cybersecurity & Data Privacy Index.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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