Shock and awe: Earnings season so far
07/21/17

You say you want a revolution? That’s what some traders are getting this earnings season. 

We’re not even one-third of the way through quarterly results, and already some major surprises have taken shape. Let’s review…

Netflix and Chill

First and foremost is the new digital dawn with Netflix (NASDAQ: NFLX) front and center. The streaming-video behemoth raised guidance as programs like House of Cards kept eyeballs glued to screens. More than five million new customers—almost the population of Norway—logged on for the first time last quarter, obliterating consensus estimates.1

At least one analyst is also warning that NFLX's gain will be pain for traditional media companies like Charter Communications (NASDAQ: CHTR) and Comcast (NASDAQ: CMCSA), which both report next Thursday, July 27.2

Meanwhile on Wall Street...

The other big shakeup so far is on Wall Street, where the once-vaunted trading team at Goldman Sachs (NYSE: GS) may be eating some humble pie. Bond activity plunged 40 percent and commodities had their worst quarter ever. This as Morgan Stanley (NYSE: MS) blitzed past expectations.3

Speaking of expectations, everyone was pretty geared up for financial earnings… After all, they got a “clean bill of health” from the Federal Reserve and permission to share the wealth with investors in a big way. Nonetheless, most big names like Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) have gone pretty much nowhere.

Keep on Trucking?

If only the transports were so lucky! United Continental (NYSE: UAL), for instance, plunged to levels last seen in early May after warning that its fares would stay flat.4 CSX (NYSE: CSX) gave investors a sinking feeling with tepid guidance. And you know those stock buybacks? Don’t get too used to those either.5 Trucker C.H. Robinson (CHRW) also veered sharply to the south and careened to a new 52-week low on the toxic trio of bad earnings, bad margins, and bad pricing.6

So what’s on deck? Take a look at technology, where some of the country’s most valuable companies report. Alphabet (NASDAQ: GOOGL), the second-biggest by market capitalization, announces Monday night. Seventh-ranked Facebook (NASDAQ: FB) follows next Wednesday. Amazon.com (NASDAQ: AMZN), fourth on the list, is due the next day. All those names are big favorites of options traders. (Just check out the recent activity in FB.)  Ditto for oil giant Exxon Mobil (NYSE: XOM), which is slated for Friday morning and just happens to be America’s 8th biggest company.

All about the Benjamins

But more than just company reports can affect earnings. Bean counters at the Wall Street Journal have watched as the U.S. dollar crumbled to 11-month lows. What’s bad for the greenback, they surmise, is good for companies with lots of business overseas.7 That may lure the gaze of traders back longingly to technology, which generates almost 60 percent of its sales outside the U.S., according to one major firm.8

One other potential surprise some traders are starting to notice this earnings season are rumblings of inflation after companies like UAL, Alcoa (NYSE: AA), A Schulman (NASDAQ: SHLM), and Infosys (NYSE: INFY) warned about higher costs.9 Is there finally light at the end of this deflationary tunnel?

Bottom line: There are still plenty of earnings to go, but some interesting stories are already emerging.

 

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1. Reuters: Netflix beats subscriber targets, shares jump over 10 percent. 7/17/17.

2. Marketwatch: Pay TV expected to lose more than a million subscribers in latest quarter. 7/20/17.

3. Wall Street Journal: Morgan Stanley, Goldman Earnings Highlight Firms’ Diverging Paths Since Crisis. 7/19/17. Reuters: Goldman execs scrutinize bond trading after revenue nosedives. 7/18/17.

4. Reuters: United Air shares slide on outlook for passenger unit revenue. 7/19/17.

5. Reuters: CSX profit beats expectations but shares fall after-hours. 7/18/17.

6. Marketwatch: C.H. Robinson shares drop after hours after earnings disappoint. 7/19/17.

7. Wall Street Journal: Why a Weaker Dollar Is a Source of Market Strength. 7/18/17.

8. J.P. Morgan Asset Management: Guide to the Markets (6/30/17).

9. Reuters: Alcoa trims forecast for earnings measure. 7/19/17. Marketwatch: A. Schulman shares slide 16% after company issues profit warning for 2017. 7/20/17. Reuters: Infosys manages slight first-quarter profit increase, labor costs cloud outlook. 7/13/17.