Stocks have gotten a boost from optimism for U.S.-China trade talks, but earnings could take a bigger role in the week ahead, when reports roll in from a diverse group of companies in tech, railroads, pharma, airlines and consumer products.
Stocks closed higher for a fourth week, amid talk the market may be getting overbought. The S&P 500 was up 2.9 percent for the week, to 2,670, giving it a gain of 13.6 percent from the Dec. 24 closing low. Going into the week, strategists were wondering if the S&P could even hold above the 2,600 level, a key area of resistance, but it punched through the level, ending the week above the band of resistance.
“I think the market had made even the pros frustrated. At this point, if you haven’t bought the market this year, it’s not the most prudent thing to do to chase it today. At the same time, being short is frustrating,” said Scott Redler, partner with T3Live.com.
Redler said he’s still long the market, but is hedging because the quick gains have made it riskier. “The next stop traders are looking at is 2,700 to 2,730 … next week could be a good week for a pause while [the market] digests the move.” Redler said next week’s reports will be important, but the following week will be key with Apple and Amazon.
Headlines on trade were a positive this past week, including one that the U.S. was considering rolling back tariffs and another that China was offering to ramp up U.S. imports.
“We are going to continue to see these headlines until the deadline,” said Cesar Rojas, Citigroup global economist. Rojas said he expects to see a deal between the U.S. and China by the March 1 deadline, and while all the details may not be ironed out, he does not expect to see more tariffs.
“The focus for China is to stabilize its economy. One of the reasons we see a window of opportunity for a trade deal is the growth dynamics for the U.S. and China. We see still growth in the U.S., weakening growth in China for the first half, but for the second half, we see stabilizing growth in China and moderating growth in the U.S.,” he said. He said the next senior-level talks at the end of the month could be key.
“I think you want to watch trade. We have a client survey we do once a quarter, and more than half the investors thought we would not get a trade deal by March 1,” said Lori Calvasina, head of U.S. equities strategy at RBC Capital Markets. “I think that’s part of the reason the market’s been acting better in here. It’s not that anything has happened, but you have some nice news, news that’s moving in a positive direction.”
Economic reports in the week ahead will be limited due to the government shutdown, which in itself is a growing risk for markets as economists say it could shave a tenth of a percentage point off GDP growth for each week it continues. Regularly scheduled durable goods will not be available, but there will be existing home sales Tuesday and jobless claims on Thursday, among others.
For the stock market, earnings will be important, with nearly 60 S&P companies reporting. That includes IBM and Johnson and Johnson on Tuesday; Procter and Gamble and United Technologies Wednesday, and Intel and Starbucks Thursday.
Financial companies were a mixed bag in the past week, with some high-profile misses such as Morgan Stanley and J.P. Morgan, with its first miss in 15 quarters.
Earnings growth at this point is expected to be up 14.2 percent, when considering companies that have already reported, according to Refinitiv.
“You have to be a little careful at this point. It’s very lumpy when you’re coming out of the gate sector-by-sector,” said Calvasina. “I think the industrials are going to be an important sector. I’m curious to see what’s going to happen to them. The margin expectations have been pretty high, and a lot of the sell-side expectations are baking in expansion.” Calvasina said the sector was one of the most vocal last quarter about the impact of tariffs and could have updates on the impact.
For tech, earnings expectations have been coming down and are now at 2.6 percent growth for the sector in 2019. The lowered expectations for technology companies have trailed the declines in other sectors, such as materials, consumer discretionary and health care, Calvasina said. Overall, the S&P is expected to see earnings growth of 6 percent in 2019, down from more than 23 percent in 2018.
Even with lowered earnings expectations, technology stocks are not really reflecting the earnings cuts as much as some other sectors. Semiconductors has been a culprit, pulling down the whole group. On a price-to-earnings basis, relative to the market, technology P/Es have been creeping higher, not falling, she said.
“The damage to earnings is worse than the damage to the price,” she said, meaning that the stocks could be vulnerable this earnings season.
The World Economic Forum begins in Davos, Switzerland, on Sunday. President Donald Trump and Cabinet members are not attending because of the government shutdown.
