Earnings season sneak peek
07/13/18

Sometimes it may seem like “earnings season” is longer than baseball season, but the term really refers to the three weeks or so each quarter that feature the most—and most noteworthy—stocks. And it’s about to start for Q2 results. The question at hand: Will this one follow the Q1 script?

A typical headline from that season ran something along the lines of “XYZ Drops Despite Crushing Earnings Estimates.”

There are lots of reasons any single stock may not rally after releasing better-than-expected earnings and revenue numbers—maybe it rallied strongly leading up the report, maybe a negative sector or market-wide story weighed heavily on all stocks that day—but the regularity with which companies released outperforming Q1 results and watched their stocks take a beating seemed a bit unusual.1

A few factors may have contributed to the trend. Numbers were coming in when the market was still in the throes of dealing with its first real market correction in two years, and trade wars were really heating up; uncertainty abounded. Throw in the fact that many stocks may have been perceived (in hindsight, of course) as overbought after the August 2017-January 2018 rally, along with concerns that at least a portion of the positive stats may have been the product of a one-time boost from tax overhaul, and you have a recipe for some underwhelming responses to some pretty good numbers.

As Q2 results start flooding in (next week will be busy), traders will be watching to see how the market reacts this time around. Expectations around the Street seem to be for strong-but-not-blowout numbers.2 Will that mean tepid market responses, or will traders turn the Q1 scenario on its head and bid up shares regardless? Stranger things have happened. There may still be plenty of uncertainty in the market (when is there not?), but the Nasdaq 100 (NDX), Russell 2000 (RUT), and S&P Midcap 400 (MID) have all made record highs in the past several weeks; the S&P 500 (SPX) made a four-month high yesterday.

Today features earnings from a handful of high-profile financial stocks, including Wells Fargo (WFC), which, despite staging a late-2017 rally that took it to record highs in the wake of its fake-account scandal,2 has joined its fellow banking stocks in underperforming the broad market this year.

Wells Fargo (WFC), 12/29/17 – 7/12/18. Wells Fargo (WFC) daily price chart. Closing the gap

Source: OptionsHouse

But the chart above shows that over the past few months WFC has been outperforming some other big banks, represented here by JPMorgan Chase (JPM), Bank of America (BAC), and PNC (PNC), edging higher off its mid-April lows and closing the year-to-date performance gap.

The longer-term chart below shows the stock has rallied more than 12% off its April low, which occurred in the vicinity of the general support zone defined by the 2017 lows.

Wells Fargo (WFC), 7/22/16 – 7/12/18. Wells Fargo (WFC) price chart. Rebound off support

Source: OptionsHouse

Today’s market action in WFC and the other stocks reporting earnings may be more than an indication of the market’s take on these companies; some traders may think it hints at how the market is likely to respond in general this earnings season.

Market Mover Update: A day after airlines took it on the chin, Delta Airlines (DAL) was up more than 1.5% late in yesterday’s trading session, while BioMarin Pharmaceutical (BMRN) popped the top on its trading range, jumping more than 2% to its highest level since 2015.

 

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1 Forbes. The Week Ahead: Can Stocks Rally Through The Earnings Season? 7/8/18.

2 MarketWatch. Why stock investors may be disappointed by the coming earnings season. 7/12/18.

3 CNN.com. Warren Buffett defends Wells Fargo's 'cardinal sin'. 5/9/18.