Stock indexes rose again today—except for the Dow, which finished down less than four points because Netflix is not part of the benchmark.
The S&P 500 rose 0.2%, to 2839.13, while the Dow Jones Industrial Average dipped 3.79 points, to 26,210.81. The Nasdaq Composite gained 0.7%, to 7460.29, thanks to Netflix’s (NFLX) 10% post-earnings rally. The Nasdaq and S&P 500 both closed at all-time highs; for the S&P 500m it was the 12th record of the month—a record of its own.
For a glimpse at the kind of animal spirits that are helping drive the market higher, look no further than the World Economic Forum in Davos, Switzerland. According to The Wall Street Journal, CEOs at the forum expressed optimism about the strength of the U.S. and global economies. Some attendees, however, see a little too much optimism. Scott Minerd, chairman of investments at Guggenheim Partners, notes that the sentiment is so positive that discussions at the forum will focus on just how good it can possibly get. He contrasts that with sentiment in January 2016, where the consensus was convinced that the world was on the brink of recession.
So what should we make of that? Minerd has his view. “I am starting to consider that Davos may be a valuable contra-indicator,” he says. “While I am hesitant to jump to a conclusion, I am troubled by the euphoria undergirding the gathering here.”
Might the same be said of the market?
What’s Wrong With Procter & Gamble?
Procter & Gamble (PG) took a hit after the home and personal-care products giant reported fiscal second-quarter earnings that analysts picked apart.
It wasn’t that the numbers themselves were bad. P&G said it earned $1.19 a share, a nickel better than analysts expected. Revenues rose 3.2% year over year, to $17.39 billion, which matched consensus estimates. For the full fiscal 2018 year, P&G expects earnings up 5% to 8%, to $4.12 to $4.23, about in line with the $4.17 consensus. It sees revenues up 3%, to $67 billion, a touch lower than the $67.12 billion analysts are expecting.
Behind the headlines, however, there was a lot not to like. Wells Fargo’s Bonnie Herzog, who reiterated her Market Perform rating on the stock, complained that P&G’s better-than-expected EPS was “not a quality beat,” given lower-than-expected gross margins and little near-term benefit from lower corporate taxes. Raymond James’ Joseph Altobello, who reiterated his Market Perform rating on the stock, groused that P&G’s valuation looks full, especially ahead of a sustainable, broad-based recovery in sales.
Procter & Gamble dropped 3.1%, to $$89.05, and has fallen 3.1% this year on the heels of a lackluster 2017. How much further can it fall? —Teresa Rivas
Oh, Wait. Maybe the Treasury Bull Market Isn’t Over Just Yet
Over the weekend, we warned that the stock market might not weather a rise in bond yields as well as some imagined. Now we’re wondering what we were so worried about.
That’s because the yield on the 10-year Treasury traded over 2.66%, a level that was supposed to signal a “breakout” that could take it as to 3% or higher—and end the bond bull market once and for all. That’s not quite what’s happened. Today, the 10-year yield closed at 2.622%, down 0.o4 percentage point. Yield-sensitive sectors, which had been hammered to start the year, also rallied: The S&P 500 Utilities Sector Index gained 1%, while the S&P 500 Real Estate Sector Index rose 1.5%. They had dropped 4.9% and 3.6%, respectively, in January through last night’s close.
Now, some market watchers are wondering if a rally in Treasuries—remember, yields and prices move in opposite directions—could be on its way. JPMorgan’s Jason Hunter and Alix Tepper note that the 10-year yield’s rapid rise “has moved indicators into extreme oversold conditions that set the market up for potential buy signals” that could take it down to 2.5%. “At this point, we are looking for bullish price action on the heels of any residual 10-year note weakness toward 2.70% to enter an initial long position,” they write. —B.L.
The Hot Stock: Resmed Soars 15%, but Not Everyone’s a Fan
There are earnings beats, and then there are earnings beats. Consider Resmed’s (RMD) numbers after it reported its fiscal second-quarter earnings report an example of the latter.
Resmed climbed 15% to $100.35 today, a new 52-week high. That gained made it the biggest gainer in the S&P 500 today.
Resmed’s earnings certainly looked good. The health-care tech company said it earned $1 a share on revenue that rose 13.4% year over year to $601.3 million. Analysts were looking for earnings of 78 cents a share on revenue of $583.8 million. The results were so good that Resmed scored a couple of analyst upgrades as well, with Northland Capital upping it to Market Perform from Underperform, and Needham raising its rating to Hold from Underperform, citing sustainable revenue growth.
But there’s a lot not to like, explains Barclays analyst Matthew Taylor, including Resmed’s 45% rise during the past 12 months, which has pushed the stock’s valuation to extremes. Its tax bill, meanwhile, is likely to go back up next year because of Australian legislation. As a result, Taylor reiterated an Underweight rating on the stock. Valuation was also the reason cited by Macquarie analyst David Bailey when he cut the stock to Underperform from Neutral today.
Resmed is up 19.7% year to date and more than 45% in the past 12 months. —T.R.
The Biggest Loser: Johnson & Johnson
Johnson & Johnson (JNJ) tumbled to the bottom of the S&P 500 on Tuesday, despite its better-than-expected fourth-quarter earnings report.
And what a drop it was, as J&J fell 4.3% to 4.3%, its biggest decline since 2009.
J&J said it earned $1.74 a share on revenue that climbed 11.5% year over year, to $20.2 billion. Analysts had expected earnings of $172 on revenue of $20.08 billion. For the full year, J&J forecast earnings between $8 and $8.20 a share, on revenue of $80.6 billion to $81.4 billion. Analysts were looking for earnings of $7.87 on $80.71 billion in sales.
So what happened? Well, J&J has had a pretty good year, so it could be some profit-taking on the news. And while plenty of analysts are still bullish on the stock, others warn that in this environment, great, not just good, results are what investors want.
J&J is still up 1.5% year to date, and 26% in the past year. —T.R.
