US index futures open lower despite strong earnings reports from UPS and PepsiCo.
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The central theses
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Investors remain cautious amid supply chain concerns
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US stocks to open lower on mixed results from UPS, PepsiCo, General Electric and 3M
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The durable goods report rebounds strongly
Shawn Cruz Director of Derivatives Strategy, TD Ameritrade
(Tuesday Market Open) U.S. index futures markets reversed after Monday’s results as many investors remain concerned that the lockdown in China will further hamper an already stressed supply chain. However, some Asian markets rallied overnight. The Nikkei rose 0.41% and the Hang Seng gained 0.33%. The Shanghai lost 1.44% to its lowest level in almost two years. Authorities in Beijing have expanded virus testing to most of the city and raised concerns about further lockdowns. European stocks recovered from their two-day sell-off.
Potential market movers
PepsiCo (PEP) gained 0.4% in premarket trading after releasing its financial results. Sales came in at $16.2 billion, beating estimates of $15.54 billion. Earnings per share (EPS) came in at $1.29 versus analyst estimates of $1.23. Pepsi executives said they expect full-year organic growth of 8%, up from a previous estimate of 6%.
General Electric (GE) slipped 3.2% premarket after the industrial conglomerate reported first-quarter adjusted earnings and sales that beat expectations but fell short of free cash flow and presented a weak outlook. The company’s CEO reaffirmed its January 2022 guidance range of $2.80 to $3.50 per share and free cash flow of $5.5 to $6.5 billion, but noted that both metrics declined given inflation and other evolving market stresses trended downward. Total revenue fell 0.2% but came in above the consensus of $16.85 billion at $17.04 billion. Earnings per share rose to 24 cents a share, ahead of the estimate of 13 cents.
United Parcel Service (UPS) delivered better-than-expected earnings with adjusted earnings per share of $3.05 versus an estimated $2.88. Revenue of $24.38 billion beat the consensus of $23.8 billion. UPS also confirmed its 2022 guidance. UPS management said it has demonstrated pricing power with customers to date and has also increased its total share buyback target to $2 billion for 2022.
Shares of 3M (MMM) fell premarket (0.38%) despite reporting adjusted earnings per share of $2.65 on sales of $8.8 billion. Wall Street expected earnings per share of $2.32 on sales of $8.7 billion. Ahead of today’s report, 3M stock is down about 16% year-to-date. The forecast for the remainder of 2022 remains unchanged.
Crude oil (CL) futures rebounded, up 1.36% after a five-day decline. Investors reassessed the impact of the worsening COVID-19 situation in China on the global demand outlook. Natural gas (NG) futures are up 4.38%.
The durable goods (ex-transport) report came in at 1.1%, well above the consensus of 0.6% and a sharp rebound from the previous February report of -0.5%.
Housing will be under the microscope today with the Case-Shiller home price index for February and the FHFA home price index later today. This could impact homebuilder stocks, many of which have risen over the past few trading sessions.
After the close today, watch for gains from Alphabet (GOOG), Microsoft (MSFT) and Visa (V).
Review of Market Protocol
Shares looked poor yesterday after a morning sell-off that led the S&P 500 (SPX) to test the 4,200 level. However, bargain hunters came and started picking up stocks at the lower levels. The buying sparked more buying and the major indices closed positive. There was no real catalyst for the rally other than possible short covering. Short sellers may have targeted the 4,200 level because it was close to the March lows and gave them an opportunity to close their positions by buying back the stock. This purchase could have attracted the bargain hunters. The SPX was up 0.57% on the day, while the Dow Jones Industrial Average ($DJI) was up 0.70% and the Nasdaq Composite ($COMP) was up 1.29%.
Growth stocks rallied as the 10-year Treasury yield (TNX) fell 80 basis points to 2.826%. The S&P 500 Pure Growth Index rallied to close 1.11% higher on the day. Investors started the day on their heels and rolled backwards, causing the Cboe Market Volatility Index (VIX) to surge to 32. At the end of the day, however, it tipped over and closed at 27.
All eyes were on Twitter (TWTR), which agreed to sell Elon Musk for $44 billion, or $54.20 per share in cash. Musk’s filing with the SEC last week showed that he had the money to buy the company and that despite using her poison pill, Twitter’s board of directors was unable to court another suitor. Mr. Musk released a statement shortly after the announcement, reaffirming his commitment to free speech, open-sourcing the platform’s algorithms, defeating spam bots and authenticating real people.
The news on Twitter was negative for former US President Donald Trump’s Digital World Acquisition (DWAC), which fell 12.9% on the news. Mr Trump planned to use the Special Purpose Acquisition Company (SPAC) to build a social media platform after being dumped by Twitter in January. Although Mr. Musk reiterated his desire for Twitter to be a platform for free speech, Mr. Trump said Monday that he has no plans to return to the platform even if he were entitled to do so.
In other news, a New York Post report yesterday afternoon said that JCPenney’s owners, Simon Property Group (SPG) and Brookfield Asset Management (BAM), are considering a bid for Kohl’s (KSS). Kohl’s attempted a turnaround last year, but investors weren’t impressed and the company felt increased pressure to seek a buyout instead. Activist investor Macellum has used his sizable position at the company to pressure KSS into finding an applicant. Now the field is getting crowded.
CHART OF THE DAY: TECHNICAL ISSUES. At first glance, the Technology Select Sector Index ($IXT – candlesticks) looks like it has moved almost in sync with the S&P 500 (SPX – pink). However, the group has actually underperformed the benchmark according to the downward trending relative strength line (green). Data Sources: ICE, S&P Dow Jones Indices. Diagram source: The thinkorswim® platform. For illustration only. Past performance does not guarantee future results.
Three things to see
Great Bellwether? The technology sector really struggled in April as the Technology Select Sector Index fell more than 10% ahead of Monday’s rally. However, starting today, some leading tech names will report gains after today’s close that have the potential to boost the sector. Alphabet (GOOG) and Microsoft (MSFT) report this afternoon, Meta (FB) on Wednesday and Apple (AAPL) and Amazon (AMZN) on Thursday.
Of these companies, Apple and Microsoft continue to earn the “pioneer” moniker. Meta is down 50% from its all-time high, suggesting the company rang its bell instead. Alphabet and Amazon are both flirting with bear-market territory, but have helped keep the tech sector and major indices from digging too deep into that forest.
Earnings Trends: Similar to the previous quarter of earnings, companies in the first quarter of 2022 are beating expectations at a higher rate than FactSet’s five-year average, but lower than the average for the past four quarters. The profit margin is even below the five-year average. As of April 22, only 20% of S&P 500 companies had reported earnings.
Energy companies are by far the biggest winners from earnings growth. So far, the energy sector has shown a growth rate of 259.4%. Materials show the second highest growth rate at 34.7%, followed by industrials at 32.6%. Communications, Consumer Discretionary and Financials report negative growth rates of -0.27%, -12.6% and -21.4% respectively. The average earnings growth rate for the S&P 500 is 6.6%.
Analysts are currently forecasting an improvement for the rest of the year. Their projected earnings growth rate is 7% in Q2, 11.7% in Q3 and 11.2% in Q4.
Dimming Lights: Despite the energy sector’s strong earnings growth rate, its performance has declined in April, with the Energy Select Sector Index posting a 6.2% loss on April 25th. Falling oil prices are clouding the sector’s prospects. Instead, consumer staples and real estate were the top performers of the month, up 3.17% and 0.16%, respectively, according to the Consumer Staples Select Sector Index and Real Estate Select Sector Index. All other sectors are in the red.
Notable calendar entries
April 27: Pending home sales and earnings from Meta Platforms (FB), T-Mobile (TMUS) and PayPal (PYPL)
April 28: Apple (AAPL), Amazon.com (AMZN), Merck (MRK), Intel (INTC) and McDonald’s (MCD) gross domestic product and revenue
April 29: Earnings from Exxon (XOM), Chevron (CVX) and AbbVie (ABBV)
May 2: ISM Manufacturing PMI, Results of Berkshire Hathaway (BRK/A), Devon Energy (DVN) and Expedia (EXPE)
May 3: JOLT’s vacancies, earnings from Pfizer (PFE), Advanced Micro Devices (AMD) and Airbnb (ABNB)
good trade,
Shawn Cruz
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