19 Apr Capital 19 Catch-Up

Bank Earnings Smash Estimates As Retail Sales and Weekly Jobless Claims Show an Economy on the Mend

It was another solid week on Wall Street as all of the major indices gained more than 1%, with the Dow and the S&P500 finishing at record highs. It was the Dow and S&P500’s fourth positive week in a row, with the Nasdaq gaining for its third straight week. Investors were excited by a mix of strong bank earnings, impressive March retail numbers, and a surprise weekly jobless figure that blew estimates out of the park.

The beginning of the earnings season was the headline act, and the financial sector was front and centre. All of the major banks managed to beat estimates, mainly thanks to the decline in loan losses they have had to put aside since the beginning of the pandemic. So far the number of loan defaults have been well below initial expectations leaving the banks with an unexpected windfall for the quarter.

Goldman Sachs (GS) kicked off proceedings with record first-quarter profits and revenue of $17.7 billion that easily topped the expected $12.6 billion. It rose 2% after the results were released. Wells Fargo (WFC) was also a winner, beating on both the top and bottom line and gaining 5.5%. Earnings per share of $1.05 smashed the $0.70c expected, while revenue hit $18.06 billion. Wells also profited from recovering $1.05 billion they had set aside for loan losses. JPMorgan (JPM) made more than $5 billion in the same manner, while also being boosted by a 15% increase in fixed income trading and a 47% increase in equities trading revenue. JPM fell just under 1% however.

The next day Citigroup (C) and Bank of America (BAC) both beat expectations on profit and revenue but fell 0.5% and 2.9% respectively. The latter being punished for expenses that were higher than expected and loan growth that was weaker than expected. Morgan Stanley (MS), the last of the big six to report also beat estimates yet fell 2.8%. While PNC financial did the same and rose 2%. So while positive results for the banks didn’t necessarily correlate in wins for its shareholders it certainly boosted the overall sentiment on Wall Street and for how the economy is tracking as a whole.

Outside of the financial sector other companies to report included Dow component UnitedHealth (UNH) who jumped 3.8% after beating estimates and raising 2021 guidance. Pepsi (PEP) also announced sales had jumped 7% as the US economy slowly reopened. The beverage maker is now up around 5% since we gave it a buy last July after suffering a wild ride over the last six months. Overall 9% of the S&P500 reported in the first week with 81% beating estimates. Importantly, earnings growth is up by 30.2% so far. If it continues at this pace it will be the biggest improvement in earnings since the third quarter of 2010.

In other stock news, Nuance Communications (NUAN) jumped 16% as it was announced Microsoft (MSFT) would buy the speech recognition specialist in a $16 billion deal. It will be Microsoft’s largest acquisition since it paid $26 billion for LinkedIn in 2016. Chipmaker Nvidia (NVDA) also jumped 11% over the five sessions after advising its first-quarter guidance is tracking higher than in its initial outlook. Nvidia is now up 119% since we recommended it in March of last year.

Some data surprises also helped boost optimism for the recovering economy. Retail sales were up 9.8% in March with the recent stimulus checks providing an instant boost to spending. Economists had been expecting a gain of only around 6%. The weekly jobless claims were also impressive as only 576,000 people applied for unemployment, blowing away the 710,000 claims that were expected. It was the lowest level of claims since the outbreak of the pandemic in March last year. Consumer sentiment was also up, rising to a one year high of 86.5 from 84.9 in March.

The consumer price index was also closely watched as investors remained concerned about an unexpected jump in inflation. CPI grew by 0.6% in March which was slightly higher than the expected 0.5%, however, it was not enough to spook the markets. The index was up 2.6% from a year ago. Core CPI, which excludes food and energy costs which are often seen as less reliable due to their volatility, increased by 0.3% from the previous month and 1.6% year on year. Both the Fed and the Biden administration expect a rise in inflation over the next few months due to comparisons with last years start to the pandemic and the effect of recent stimulus checks that have increased spending. The good news is the jump will only be temporary and the Fed won’t be spooked into cutting bond purchases or raising interest rates until it is well and truly needed.

A huge earnings week will hold the attention of markets over the next five sessions. The focus will move away from the financials and into the general market as 10 out of the 30 Dow components, along with some massive S&P500 names, report their numbers. The week will kick off with Coca-Cola (KO), IBM (IBM) and United Airlines (UAL) on Monday. Johnson and Johnson (JNJ), Procter and Gamble (PG), and Netflix (NFLX) on Tuesday, followed by Verizon (VZ), and Chipotle (CMG) on Wednesday. And in the back half of the week, we’ll also see results from the likes of AT&T (T), Intel (INTC), American Express (AXP) and Honeywell (HON).

Apple (AAPL) will hold an event on Tuesday which will likely introduce some new products while also upgrade some old ones. Johnson & Johnson will also be closely watched as the USFDA look closely at its vaccine and its potential to cause the same blood clots as its Astra Zeneca counterpart. Economic reports this week will include existing and new home sales, jobless claims, and both manufacturing and services PMI.

Have a great week.