D-Day – The Earnings Battle

d day 5By David Nelson, CFA
Market historians will look back at the final months of 2018 and chronicle a war that started perhaps as early as January 30th, 2018. Interestingly, Apple (AAPL) like today was at the heart of concerns. The Wall Street Journal reported the company had reduced plans for its flagship iPhone X from 40 Million units to just 20. Just over 11 months later the market takes another kidney punch with virtually the same headline.

While Apple and its challenges certainly played a role the usual suspects trade, the Fed, dysfunctional Washington, impeachment, peak earnings and slowing global growth have all taken a toll on market sentiment. Yet in the face of all the above Bulls have put on an impressive performance closing out last week up 10% from the lows of Christmas Eve.

spx omaha

Dead Cat Bounce and Bear Market Rally are the usual slurs being called out from the bear camp with bulls pointing to another robust employment report to defend their argument. Like it or not, the Battle is raging and like D-Day 1944 the first wave is hitting Omaha Beach. 

Earnings season is here – D Day

xlf vs spx 2018

There’s no better tool or indicator than earnings to separate truth from fiction. In the end that’s all a stock certificate is. It’s your contract with the company that entitles you to your pro-rata share of the earnings and or dividends of the company. Kicking off the earnings season are Financials with Cititgroup (C) leading off Monday followed by JP Morgan (JPM), Wells Fargo (WFC), Bank of America (BAC) and Goldman (GS) Tuesday and Wednesday. Add Delta (DAL), United Airlines (UAL) and United Healthcare (UNH) and the first reports from the front lines will give us an indication of just how the war is going.

21 out of 22 analysts cut estimates for Citi (FactSet)
citi est q4

Financials come into the year as one of the more challenged sectors following a brutal 2018. Near the bottom of the pack Financials (XLF) under-performed the S&P 500 by 8% and down close to 15% on an absolute basis. The good news is that estimate revisions and valuations reflect the risks with many pricing in a recession. No question the yield curve along with concerns about slowing loan growth have forced most analysts to cut estimates. 21 out of 22 analysts have cut estimates on Citi (C) since the middle of last month.
If the bulls are going to make a stand it needs to be right here right now 
It’s difficult if not impossible to sustain a bull market without financials on board. They touch every fabric of the economy. Last week, Jamie Dimon (CEO) of JP Morgan said; “the market overreacted” and sees no recession ahead. Given the breadth and tentacles of the world’s U.S. largest bank maybe I can’t think of anyone who’s in a better position to know.
The technical picture shows the challenge. Previous support becomes resistance. On Friday, stocks closed just inside enemy territory and like D-Day are trying to defend Omaha Beach. Even if successful and stocks can hold onto recent gains it’s clear a lot of overhead supply lies ahead. Investors have memory and we’ll have to work our way through sellers who want nothing more than to break-even.