Can Netflix save the US earning season?
The streaming video giant reports its June quarter figures after the close of Wall Street trading on Tuesday (around 6am Wednesday, Sydney time). Analysts are wondering if it will produce a set of figures – especially new subscriptions – to reverse the glum sentiment about the quality of the June earnings season so far.
Netflix’s results will turn attention onto the quarterly results from mega cap techs like Apple, Facebook, Alphabet (Google) and Amazon after the big banks last week failed to convince investors with what looked like stellar figures.
Forecasts for a 66% surge in earnings from the low base set in the middle of the pandemic in the June, 2020 quarter, dominated preseason forecasts from analysts and others.
But now that’s not so assured thanks to the weak market reception for the quarterly reports from the big six banks which were, on the surface, pretty good results.
The weakness on Wall Street came despite second-quarter results so surpassing estimates by 22.1%, according to analysts at Credit Suisse in New York.
Removing year-ago comparisons show earnings are up decently from levels two years earlier and inflation is likely running about 2.6%, once last year’s low baseline is removed, said Jason Pride, chief investment officer for private wealth at Glenmede in Philadelphia, Reuters reported.
So unconvincing were the big bank figures that Friday’s wider market sell off in part was led by the slide in the shares of the six majors, JPMorgan, Bank of America, Goldman Sachs, Morgan Stanley, Citigroup and Well Fargo. They all closed down on Friday by between 1.4% and 2.3%.
For the week all but Well Fargo and Morgan Stanley fell (the two had small rises of less than 1%) and the shares of JPMorgan, Goldman Sachs, Bank of America and Citi all fell – Bank of America shares lost more than 5%.
And all the banks reported big rises in earnings which were turbocharged by releases from loan loss reserves struck a year ago in the depths of the pandemic.
All five reported weak interest income growth, slow or no growth in consumer lending – much of the revenue gains (not for Bank of America) came from investment bank, trading and merger and acquisitions fees.
Analysts say the big banks will be using loan loss reserves again this quarter but with home mortgage numbers weakening and consumer loans still sluggish, the banks will be forced to cost cutting and losing thousands of jobs.
And while Pepsi and Delta reported earnings growth (Pepsi shares rose over the week), analysts now seem to be bringing a more sceptical eye to the season.
And on top of analysts doubts about quality, there’s the continued weakness in the key 10-year Treasury bond yield which fell under 1.30% on Friday.
On the face of it bond yields should be rising – a surprise rise in retail sales in June instead of a fall (after May’s fall was revised lower) should have helped bond traders worry a little more about inflation end push yields higher.
But that didn’t happen and the wider market lost group on Friday and the week.
Defensive sectors, like health care, consumer staples and utilities gained, while cyclicals, like energy and materials were hit hard.
In fact, the energy sector had the largest percentage drop of the week, slumping 7.7% (oil prices fell but news of an possible OPEC+ deal will see shares rise) followed by a 2.6% drop in consumer discretionary.
Only three of the S&P 500’s 11 sectors rose over the week: The utilities sector climbed 2.6%, followed by a 1.2% rise in consumer staples and a 0.7% increase in real estate.
That is a sign of investors suddenly bereft of any ideas and starting to fret.
So that’s why the spread of the companies reporting this week will add to the test that is contained in the figures in the Netflix report. Even if Netflix does well, some analysts want to see higher quality figures in other results.
Netflix forecast a rise of 6 million subscribers in the March quarter, but only managed 3.98 million. That sparked a sell down.
It set the bar low for the June quarter for a rise of 1 million (because the June, 2020 quarter saw a rise of 10.09 million) so the chances are for a bigger than forecast rise to help settle investors’ concerns.
But will be enough to help the entire market is the question.
Besides Netflix, reports are expected from AT&T, Amex, Honeywell, Verizon, Coca Cola, Johnson and Johnson, Intel, United Airlines, Southwest Airlines, Tesla, Schlumberger, Halliburton, Baker Hughes, American Airlines, Dow, Twitter, Snap, Newmont, Abbott Labs, CSX, Whirlpool and Texas Instruments.
“Earnings have the spotlight in the coming week,” said Sam Stovall, chief investment strategist at CFRA was quoted by CNBC on Friday. “You’re not going to see economic data upstage earnings.”
Stovall said he is watching earnings report to see if stocks rally or languish after results. He said earnings for the S&P 500 companies are now expected to be up more than 66% for the quarter.
“I think what it means is investors are looking at this quarter as a peak quarter in the earnings cycle,” he said.
“We’re getting what analysts had expected and then some, but because we are now on the leeward side of the earnings cycle, I think investors are probably going to be taking some profits because their expectations have been met and will not be exceeded in coming quarters.”
In other words: buy on the approach, sell on the fact, and take your profits and run for a while?
