Capital 19 Catch-Up

Wall Street Finishes the Week Lower Despite Earnings Success As Tax Plans and Coronavirus Infections Dampen Enthusiasm


Wall Street finished slightly to the downside last week despite a barnstorming Friday session. The late surge managed to claw back much of the losses from earlier in the week, with the benchmark S&P500 just falling short of breaking even with a 0.1% loss. The Nasdaq closed out the week in second place, falling 0.3%, while the Dow suffered from some poor earnings results and closed down 0.5% over the five sessions.

Earnings continued to impress, however this didn’t have much of an effect on share prices. So far this earnings season, the 90% of S&P500 stocks that have beaten earnings estimates are down 0.62% on average. It’s quite an aberration considering the average over the last fifteen years has earnings winners averaging gains of 1.86%. It’s looking like a lot of the earnings wins have been already built into valuations. Companies this season not only have to beat on the top and bottom line but to impress with guidance as well. And that’s tricky when there is so much unknown with pandemic reopenings, not just in the US but abroad as well.

Coca-Cola (KO) was one of the larger winners, with better than expected results for both profit and revenue, and the soft drink maker also advising that demand in March had reached pre-pandemic levels. They also announced they would be spinning off Coca-Cola Africa into a new entity and stock market listing. Its CEO James Quincy remarked, “We are encouraged by improvements in our business, especially in markets where vaccine availability is increasing and economies are opening up, and we remain confident in our full-year guidance”.

Procter & Gamble (PG) was another who gained after announcing earnings. The health and personal care conglomerate has benefitted from consumers keeping up personal hygiene measures that they picked up during covid, while also beginning to purchase beauty products again which were left to stagnate under lockdown conditions. PG is the subject of our stock report today so you can read a more detailed report there on how we think the company is faring.

Other winners included Snap (SNAP), owners of the social media photo and video app Snapchat. Shares jumped 7.5% after they grew revenue to $770 million and increased user numbers throughout the quarter. Importantly they expect year on year revenue growth of 80-85% for the second quarter. Johnson & Johnson (JNJ) jumped 2.3% after beating on top and bottom and advising they had collected more than $100 million in sales of their covid-19 vaccine in the first quarter. The vaccine is currently suspended but it is expected to be cleared for use again this week.

The earnings strugglers included American Express (AXP) who missed estimates entirely and fell 4% on the news. Chipmaker Intel (INTC) beat estimates but disappointed investors with poor guidance and lost 5% for its trouble. While Dow component Dow Inc (DOW), a chemical maker and not the index owner, also beat estimates but lost 6%. They are still up 10% for the year, however.

The airlines were also under the pump as United Airlines (UAL) missed badly and fell 8.5% earlier in the week, dragging the rest of the sector with it. Southwest Airlines (LUV) held the same fate despite beating estimates with a narrower than expected loss and advising that bookings continue to rise. The Texas-based airline expects to be flying at 85% of its pre-pandemic capacity by the end of the second quarter. LUV still fell 1.6% on the news.

Netflix (NFLX) was perhaps the biggest loser, even though it also beat analyst estimates. It was down by more than 11% during the session, before finishing the session 7% lower. They grew revenue by more than 24% year on year, taking full advantage of covid lockdowns and having people stuck at home in front of their television sets. Earnings per share hit $3.75, more than the $2.97 expected, while revenue clocked $7.16 billion, higher than the $7.13 billion needed. However, the streaming network added 3.98 million new subscribers in the quarter where the market was looking for 6.2 million. Netflix put the blame on the ongoing coronavirus pandemic which has forced them to delay production for its biggest shows and movies. They also expect to add another 1 million subscribers in the current quarter which is also below estimates.

The other big market-moving news of the week was the Biden administrations proposed Capital Gains tax increases. The major indices fell across the board on Thursday as the new scheme was announced. In it, the government plans to increase CG T from 20% to 39.6% for anyone who earns more than $1 million per year. That’s 43.4% when you add the 3.8% net investment tax that is paid by all. It sounds quite reasonable for us poor suckers here in Australia who would dream about having Capital Gains tax at only 20% but there you go.

The selloff after the tax announcement seemed to be quite heavy-handed. The Democrats majority in both houses is quite slim, and it’s expected that they will have to whittle down those numbers to a more sensible level before such laws are passed. Industry participants were also quick to point out that US Taxable domestic investors own only about 25% of the US stock market. The rest is held in retirement accounts, endowments, and by foreign investors. And of that 25%, it will only affect those that earn more than $1million per year. For these people, the stock market will still be the best place to keep their money. It’s likely to have a very small impact on share prices if any.

Coronavirus news, however, continues to play havoc on the markets. Reopening stocks like airlines and cruise lines had a wild week with swings of 5-10% common on most days. There has been an alarming increase in covid infections globally, even while vaccinations continue to gain speed. India is now experiencing more than 350,000 new cases per day, as the country’s medical system buckles under the strain. Even in the US, they are getting 67,000 new infections per day on average. On the flip side, they are also vaccinating up to 3 million people per day. The tide is turning but it seems we are not quite there yet.

In the week ahead more than a third of the S&P500 will be reporting their earnings numbers. The big tech names will be out in force with Apple (AAPL) Microsoft (MSFT), Amazon (AMZN), Facebook (FB) and Alphabet (GOOGL) all releasing their numbers. Other big names to report will include Tesla (TSLA), UPS (UPS), General Electric (GE), Starbucks (SBUX), Boeing (BA), Ford (F), Qualcomm (QCOM), Merck (MRK), Caterpillar (CAT), and oil giants Exxon Mobil (XOM), and Chevron (CVX).

Elsewhere the Federal Reserve will hold their monthly meeting but are expected to keep interest rates as they are. No doubt they’ll also be reiterating their plan to let inflation set in before they make a move. Data wise we’ll have the Durable goods orders for March, the home price index, pending home sales, personal income and consumer spending.

Have a great week.