Earnings season is here and numerous global companies have smashed earnings expectations. There have also been a number of earnings disappointments, which leaves investors with a mixed view of the global economic environment.
The global economy had a rough fourth quarter last year and many people thought that would translate into poor earnings. Surprisingly, there hasn’t been a wave of terrible earnings reports. Actually, companies like JP Morgan and Microsoft have reported amazing earnings. JP Morgan smashed analyst expectations, which sent the company’s shares higher.
On the other hand, the broad market has yet to move decisively higher. Part of the problem could be that many stock indices are already trading at record highs, which could make investors nervous about smashing the buy button and running markets higher.
JP Morgan Earnings Surprise to the Upside
JP Morgan posted record results in early April. The megabank’s revenue and profit both rose by 5% from the quarter before, to $9.18 billion and $29.9 billion, respectively. JP Morgan was helped by the last fed rate hike, which happened in late 2018.
JP Morgan CRO Jamie Dimon commented that, “Even amid some global geopolitical uncertainty, the U.S. economy continues to grow, employment and wages are going up, inflation is moderate, financial markets are healthy and consumer and business confidence remains strong,” after the earnings were released.
After the bank’s earnings were released its shares surged by more than 4%, which was the biggest one-day gain since 2016. JP Morgan shares have continued to rally. As the month closes, they are trading near all-time highs.
JP Morgan’s results were positive, though the rising interest rates that made them possible have gone on hold. The FED seems to have taken a break from interest rate tightening for the moment, though a recent US GDP print that came in above 3% may push the FED to reconsider its current direction.
Microsoft Reports Great Earnings, Tops $1 Trillion Market Cap
Microsoft didn’t seem to be affected by the terrible end to 2018 and reported amazing results. The company reported that revenue rose by 14% to $30.6 billion and net income rose by 19% to $8.8 billion on a year over year basis.
Revenue from the company’s cloud hosting business did especially well, and together with its office products, rose by 19% from a year earlier. The earnings which Microsoft reported helped the company’s stock to rally over the $1 trillion market cap line. This puts Microsoft in the same club as Apple and Amazon, both of which are also worth more than $1 trillion.
Since the earnings were announced Microsoft stock has fallen slightly but remains near all-time highs. It is trading near 30 times earnings, which is somewhat high by historical standards. Given the buying momentum behind the tech sector, companies like Microsoft may continue to rise into uncharted territory. Whether or not this will have a happy ending is anyone’s guess.
3M Gets Hammered
3M reported that earnings came it at $2.23 per share, adjusted compared to the expected print of $2.49 via a Refinitiv survey. Revenue also missed expectations, with actual revenue coming in at $7.863 billion opposed $8.025 billion from the same survey.
While the earnings from 3M weren’t way off from expectations, the negative surprise was enough to slam 3M shares down by 12% on the day earnings were announced, which was the biggest single-day fall since the crash of 1987.
The fact that 3M cited trouble in some of its key markets may be part of why Wall St. decided to slaughter 3M shares, but such a large reaction in the price brings up additional questions about the state of the market.
3M shares have yet to recover, and there could be more selling in store. The company stated that Asian markets had slowed, which was a big contributor to the earnings miss. 3M also plans to lay off 2000 employees, which is expected to cut costs over the rest of the year.
Major Equity Indices Move Higher
It is hard to ignore the new highs that major equity indices are logging on an almost daily basis. Both the NASDAQ Composite and the S&P 500 have eclipsed the all-time highs they set last summer. The major indices in the UK and EU have also been rising steadily, though they remain below all-time highs.
One of the most interesting things to consider is how the markets react to seemingly small disappointments. 3M missed earnings estimates by a small amount, but the stock was nailed. Other companies like Tesla were also subject to heavy selling the wake of less-than-stellar earnings, though it hasn’t been reflected in the broad market.
Whenever there is a lot of volatility, it is a good idea to be careful. The bounce off the recent lows at the beginning of the year has been extreme and could turn around just as quickly if the market has a change of heart.
A Stop-Loss Never Hurt Anyone
Most people who buy equities subscribe to the kind of philosophy that Warren Buffet has pushed for years; look for value, and then hold on to the shares no matter what. That kind of long-term investment mentality was probably the way to go a half-century ago when he was building up Berkshire Hathaway, but it probably isn’t a great idea today.
The reason why shares are trading at all-time highs is simple. Central banks pumped trillions of dollars into the global financial system, and just about everything has risen in price. The fact that a luxury smartphone manufacturer (Apple) is worth more than a trillion US dollars should be cause for concern.
Equity prices may rise further from here. If they have come this far, there is nothing stopping them from laying down a Bitcoin-esque parabolic top, before crashing back down to much lower levels. If you plan to buy into this market or hold onto winning positions from the longest bull run in US history, make sure to set up stop loss orders.
Once the market turns, it will be ugly for anyone on the long side of the trade.