The first quarter earnings season kicks off this coming week. With stocks trading at all-time highs, it’s safe to say the tenor for risk assets is extremely optimistic. And it’s not hard to understand why.
On Friday, the Dow Jones Industrial Average rose 297.03 points, or 0.89%, to close at 33,800.60. Strong performances in Apple (AAPL), Salesforce (CRM), Microsoft (MSFT) and Intel (INTC) helped offset weakness in Boeing (BA) and Disney (DIS). The S&P 500 index SPX rose 31.63 points, or 0.77%, to end the session at 4,128.80, while the Nasdaq Composite gained 0.51%, adding 70.88 points to finish at 13,900.19. The fact that the Nasdaq rose despite declines in tech giants Tesla (TSLA), Peloton (PTON) and Zoom Video (ZM), among others, was notable.
Nevertheless, the three main averages finished the week in positive territory and continue their march higher despite persistent concerns about not only rising bond yields, but also a fear of weakened global economic recovery. When evaluating stocks, investors are assessing the risk-versus-reward potential in relation to the pace of re-opening. Aside from widespread vaccinations across the country, which some analysts forecast will lead to a surge in economic growth, investors are already banking on the $2 trillion infrastructure spending plan proposed by the Biden administration.
These catalysts are factored into the the growth expectations not only for the first quarter, but also for the second quarter as well. Ethan Harris, Bank of America’s head of global economic research, expects Q2 to deliver 10% economic growth. The question is, is all of the good news already priced in to stocks? The market will get that answer once CEOs start issuing 2021 guidance, which will presumably be more optimistic than last year, when guidance was (understandably) pulled, with many CEOs citing poor visibility in the wake of the pandemic's outbreak.
However, CEOs being conservative with their guidance won’t work this time around, particularly as many industries are preparing for the reopening of the U.S. economy. The median GDP growth forecast for second quarter is 9.3%, compared to 5.8% rise in the first quarter. Not only does the market fully expect companies to issue guidance this time around, but stock prices suggests investors are betting that said guidance will be raised, particularly in industries that were most-impacted by the pandemic.
The question that keeps coming up, are investors’ growth expectations and optimism surrounding the economic growth well placed? Even if they are, while analysts aren’t ready to proclaim stocks are cheap, it will nonetheless take impressive revenue and earnings beats and the aforementioned confidence guidance to keeps the momentum going.
As we kick off the new earnings season, here are this week’s names that will set the tone for what’s to come in the weeks ahead.
JPMorgan Chase (JPM) - Reports before the open, Wednesday, Apr. 14
Wall Street expects JPMorgan to earn $3.06 per share on revenue of $30.42 billion. This compares to the year-ago quarter when earnings came to 78 cents per share on revenue of $29.07 billion.
What to watch: Without question, JPMorgan has established a well-deserved reputation as being the best-executing bank not only among its peer group, but one of the best-run banks in the world. Driven by its ongoing investments in areas like technology, marketing, the bank’s share price has outperformed its competitors over the past six months and twelve months. And given its organic expansion initiatives to develop new branches/loan offices, these growth trends are poised to continue. But with the stock trading some 12% higher than pre-pandemic levels, all of this good news I’ve just listed are known by the market evidenced by 22% year to date rise in JPMorgan stock, compared to 9% rise in the S&P 500 index. What additional catalysts, whether near term or long term, will drive the share price higher, particularly in the low-interest rate environment? That is the answer the market will listen for on Wednesday.
Wells Fargo (WFC) - Reports before the open, Wednesday, Apr. 14
Wall Street expects Wells Fargo to earn 68 cents per share on revenue of $17.46 billion. This compares to the year-ago quarter when earnings came to 1 cent per share on revenue of $17.72 billion.
What to watch: Wells Fargo stock has been a hot commodity among the banks, skyrocketing more than 60% over the past six months. With the stock now up 32% year to date, besting the 9% rise in the S&P 500 index, the market appears willing to look beyond some of the bank’s legacy issues and certainly some near-term headwinds. While there are still plenty of challenges for Wells Fargo, including the fact that it has to balance much-needed cost cuts with revenue/business growth, the bank has nonetheless executed as well as anyone might have expected. Last quarter, not only were the bank’s charge-offs and core provisioning both better than expected, Wells Fargo’s adjusted expenses were also lower, helping to deliver a 12% beat on the bottom line. Notably, this is with revenue generation still under pressure by both the weaker rate environment and the adjustments Wells Fargo has had to make to stay in compliance with the asset cap. As it stands, the bank now has tons of catalysts to sustain profitability and return value to shareholders.
PepsiCo (PEP) - Reports before the open, Thursday, Apr. 15
Wall Street expects PepsiCo to deliver EPS of $1.12 per share on revenue of $14.54 billion. This compares to the year-ago quarter when earnings were $1.07 per share on $13.88 billion in revenue.
What to watch: The snack and beverage giant has seen its stock price surge almost 10% over the past thirty days. But even with the recent rise, the stock is still down about 4% year to date, training the 9% rise in the S&P 500 index. Notably, Pepsi has underperformed despite reporting not only rapid organic sales growth, but also strong free cash flow in 2020 amid the pandemic. During which, Pepsi (at various times) has been impacted due to the lockdown restrictions and the effect this has had on the restaurant industry that Pepsi supplies beverage to. Meanwhile, the company is investing in new brands and adapting to new trends which has begun to pay dividends evidenced by the 5.7% rise in organic revenue growth in the last quarter. Unit volume was also strong, up 3% for food/snacks, while rising 5% for beverages. The company still believes that there is plenty of room for growth in its core snacks and beverages business. On Thursday it will need to demonstrate that growth.
Alcoa (AA) - Reports after the close, Thursday, Apr. 15
Wall Street expects Alcoa to earn 46 cents per share on revenue of $2.65 billion. This compares to the year-ago quarter when it posted a loss of 23 cents per share on revenue of $2.38 billion.
What to watch: Shares of the aluminum giant have been one of the bright spots in the materials sector, rising almost 10.5% over the past month and is now up 36% year to date, besting the 19% rise in the SPDR S&P Metals & Mining ETF (XME). The rise in metal stocks have been driven by optimism surrounding the Biden administration’s $2 trillion infrastructure spending plan that is aimed at boost repairing the country’s roads and bridges, among other projects. How much of that money will come to Alcoa? The company last quarter posted its tenth consecutive quarterly profit beat, thanks to improving aluminum business. While there appears to be support for higher aluminum prices, the company on Thursday must speak positively about the demand/supply outlook for the next several quarters to keep Alcoa stock in high demand as it has been.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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