The dog days of August open today with Apple Inc AAPL 0.17% earnings the main event, barring any sudden news developments between now and the closing bell. The company opens its books this afternoon, capping off the tech phase of reporting season.
Wall Street analysts look for AAPL to report earnings of $1.57 a share, and AAPL has a generally good track record of meeting Wall Street’s projections. As always, focus is on the iPhone, sales of which fell slightly on a sequential basis the last time AAPL reported.
This time out, one of the biggest things to watch for is news about the next iPhone launch date. There are a lot of rumors about the company being behind schedule, but that hasn’t been confirmed. Typically, AAPL has launched new versions in September, and that’s been the expectation for iPhone 8 as well. The stock is up 40% this year, so let’s face it, there appears to be a lot riding on the iPhone 8 launch. If the company launches later than analysts had expected, that could potentially affect Wall Street’s earnings projections for coming quarters.
One other thing to keep an eye on is AAPL’s services business. This is a narrow part of the company, with only 13% of revenue, and includes iTunes and apps. What’s interesting is that in the music business, rival AMZN is starting to dominate voice-activated songs. It could be worth watching to see if that starts to affect AAPL’s business. It’s a small thing, but it’s good to get an early look at what could be an influential long-term trend.
What’s interesting going into the Apple earnings report is what looks like a minor sector rotation we’ve seen over the last few days. Recall that earlier this year, the tech-heavy Nasdaq (COMP) often rose on days when the S&P 500 (SPX) and Dow Jones Industrial Average ($DJI) struggled. Over the last few days, however, it’s been the opposite. Nasdaq is down three days in a row even while the DJIA has risen. It looks like some investors are taking a little money off the table as they wait for each big tech company to report, so that’s a trend to watch.
So far this earnings season, the so-called FAANG stocks — Facebook Inc FB 0.42%, Apple (AAPL), Amazon.com, Inc. AMZN 1.31%, Netflix, Inc. NFLX 0.6%, and Alphabet Inc GOOG 0.38% GOOGL 0.56% — have a 2-2 record, with investors applauding results from FB and NFLX but reacting negatively to what GOOG and AMZN had to say, at least judging by stock performance. That sets up AAPL as the tie-breaker, though it’s important to note that these stocks, while often grouped together, have a number of different businesses and aren’t directly comparable in every way.
Another big hitter this morning is Pfizer (PFE), which reported better earnings per share than Wall Street analysts had expected, but missed their estimates with its top line performance. On a positive note, the company raised guidance.
Other companies reporting this morning included BP BP 3.76%, which reported results in line with analysts’ expectations, and Under Armour UAA 5.74%, whose shares slumped in pre-market trading after UA cut its guidance.
Washington, D.C., isn’t going away. With health care legislation dying last week, it looks like Congress might be shifting toward tax reform, an issue close to many investors’ hearts.
From a data standpoint, keep an eye on the auto market today as July auto and truck sales hit the newswires. On an annual basis, sales have fallen under 17 million and are below the pace of 2015 and 2016. Later this morning there’s the ISM manufacturing index for July and construction spending for June. Also, Personal Consumption Expenditure (PCE) prices came out this morning, and this inflation indicator closely watched by the Fed was flat in June. Core PCE prices rose 0.1%, in line with analysts’ consensus. Judging by these numbers, inflation remains light.
Auto sales might be on the defensive, but oil achieved a “high-five” on Monday — meaning front-month U.S. futures hit $50 a barrel for the first time since May. The recent rally from $44 just a few weeks ago reflects a number of fundamental forces, including growing U.S. demand and continued whispers in the market about possible export cuts from other big producers. Not too surprisingly, energy emerged as one of Monday’s best-performing sectors on Wall Street, and is now up nearly 3% over the last month. However, it’s still by far the worst performing sector of the year.
FIGURE 1: LONG ROAD BACK TO $50 FOR OIL. For the first time since May, U.S. oil prices climbed above $50 a barrel on Monday. The $50 mark has been a psychological resistance level for a while, but the real question is whether the market can climb back above $55. Oil has been basically stuck between $45 and $55 for nearly a year. Data source: CME Group. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Q2 EPS Estimates Revised Upward Again
With earnings season about halfway through, S&P Capital IQ once again raised its estimate for S&P 500 Q2 earnings growth, now forecasting a 9.5% year over year rise, vs. its 6.2% projection as earnings began. More than 70% of companies have beaten on both the top- and bottom- lines, research firm CFRA said Monday in a note to investors. Looking ahead, CFRA sees EPS growth at 7.1% and 11.9%, respectively, in Q3 and Q4, with total 2017 earnings growth of 10.9%. The firm sees revenue growth at 6.2% for all of 2017. While stocks remain at or near record levels and valuations are historically on the high side, remember that earnings tend to be the ultimate driver, and it may be hard to forecast any major market corrections as long as earnings keep delivering.
Who Benefits From Lower Dollar?
The U.S. dollar continues to weaken, falling below 93 by midday Monday to its lowest level in more than two years. Assuming the dollar keeps taking it on the chin, U.S. companies with heavy sales abroad might stand to benefit from their products’ prices falling for overseas customers. Some of the S&P 500 sectors with the highest percentage of foreign sales include energy (58.88%), information technology (57.15%), materials (53.03%), and industrials (44.89%), according to S&P Dow Jones Indices. However, overall average U.S. sales abroad fell to 43.16% in 2016, from 46.29% in 2010. Also, keep in mind that while the dollar index looks low now compared to levels above 100 at the start of the year, it remains well above where it was between 2007 and 2015.
I’ll Protect You
Amid all the geopolitical storms raging in the U.S. and around the world, the U.S. stock market remains resilient, steadily scoring new highs amid low volatility. Over the weekend we saw concerns develop over another North Korean missile launch, as well as diplomatic scuffles between the U.S. and Russia. That followed the failure of health care legislation late last week and more shakeups with the White House staff. To all this, the market gave a collective shrug, with the Dow Jones Industrial Average ($DJI) posting another new record high Monday and the S&P 500 (SPX) staying flat much of the day. “The stock market has carried on in the face of adverse, external developments as if it has a force field around it,” observed Pat O’Hare of Briefing.com, in a research note. Maybe the strong earnings we’re seeing give investors something to focus besides stormy world events.