What May Markets Might Face: Earnings Season, Jobs Report, Geopolitics

What May Markets Might Face: Earnings Season, Jobs Report, Geopolitics

Key Takeaways

    Earnings Season charges on with companies like Alibaba and Cisco on tap in May 

    April’s jobs report might reveal whether healthy employment trends continue  

    Oil prices tapped six-month highs in April 

Why is the rally that lifted the S&P 500 Index (SPX) to a record closing high in late April unlike the one last summer?

One possible answer is that it’s more broad-based, and not so dependent on the handful of “FAANG” stocks that led 2018’s epic run. While that doesn’t necessarily mean the rally can continue as May gets underway, it does appear to be a healthier market. Major indices tend to be more vulnerable when they’re simply following a small herd of behemoths higher, and that arguably helped to prove the case last fall when Apple (AAPL), Amazon (AMZN) and Facebook (FB) all ran into fundamental troubles. Those companies’ struggles were among the key factors that helped to push the entire market into steep Q4 losses.

Traditionally, when markets hit new highs, as they just did, some investors get skittish worrying that stocks might be too expensive. Caution here isn’t necessarily a bad thing, and in fact, long-term investors might want to consider spending some time examining their portfolios as the new month begins to see if the rally has them more exposed to stocks than they’d planned. If that’s the case, they might want to consider rebalancing to adjust for the 17% SPX gains so far this year (as of April 24).

On the other hand, there are some good reasons why optimism might continue into May. First, there’s the previously mentioned broad-based nature of this rally. It could be argued that the market hasn’t had a true leader this time around, the way FAANG stocks led it last year. Sure, the semiconductors have been on a tear, but so have home builders and some Industrial names. If you look at year-to-date performance, Info Tech leads, but other sectors posting 20% or better 2019 performance include Industrials, Communication Services and Consumer Discretionary. Energy was up just under 20% earlier this week. That’s a pretty diverse group.

Financials, which were a laggard much of last year even when the market was in rally mode, have also put on a little run in 2019, though the sector’s 15% gains year-to-date trail the SPX’s 17% jump from Dec. 31.

So-called “cyclical” sectors—like the ones mentioned—tend to do best in a thriving economy, and have led the pack most of the year. That seems to indicate enthusiasm about the economy, especially as some analysts start lifting their estimates for Q1 growth. People tend to forget that it’s good to have different names take leadership, and we’ve seen companies like Qualcomm (QCOM) and Western Digital (WDC) play that role in 2019. Disney (DIS) and Microsoft (MSFT) are two other big companies having good years so far in the market. Chipotle (CMG) is another well-known stock that comes to mind.

Fed Seen Staying on Sidelines in May

Aside from diversity, the market might have another friend on its side in May that it didn’t have last summer: The Fed. The central bank’s recent dovish tone has helped keep 10-year Treasury yields well below 2.6% for most of this year, which can push down borrowing costs for companies and consumers and also sometimes makes stocks seem more attractive to investors because Treasuries aren’t offering competitive yields.

By contrast, back in late September when the SPX hit all-time highs, the 10-year yield was well above 3% and climbing amid concerns about inflation and Fed rate hikes. Those concerns have basically melted away with Treasury yields, for the most part. Yet here we are, back at all-time stock market highs again.

The Fed kicks off the new month with a meeting that ends May 1 (next Wednesday), and while it isn’t expected to make any rate moves, it could be interesting to hear any new economic observations from Fed Chair Jerome Powell and company. At this point, CME futures show a better than 98% chance of the Fed standing pat in May, with about a 24% chance of the Fed cutting rates in June. Rate hikes don’t appear anywhere on the near horizon, according to futures prices.

Another factor that might be in the stock market’s favor as May begins is valuations. The S&P 500’s price-to-earnings (P/E) ratio still was under 17 on a forward basis as of late April, according to FactSet, compared to above 18 last September when that rally reached its crescendo. While current P/E is up sharply from near 14 last December, it’s not far off the five-year average, so it might be hard for bears to argue that stocks are extremely overvalued.

That said, some sub-sectors (including chip companies) have seen valuations rise far more quickly than the overall market, leading some analysts to say those stocks might be “priced for perfection.” That could mean any negative earnings surprises or guidance have a better chance of carving into stock prices for those companies. Texas Instruments (TXN), however, started the chip sector earnings off with positive results, and it’s sometimes seen as a bellwether for the sector.

One more thing to consider as May begins: Some money managers say a lot of their cash remains “on the sidelines,” at least as far as non-institutional investors. While you never can predict what people might do, it’s possible more of that “sideline” cash could be directed into stocks as May continues, especially if earnings continue coming in better than expected.

Mark Your Calendar

Here are a few data and events to watch for in May. 

May 1 ISM Manufacturing, FOMC Statement
May 3 April U.S. Jobs Report
May 9 Producer Price Index
May 10 Consumer Price Index
May 15 Retail Sales, NAHB Index
May 16 Housing Starts
May 21 Existing Home Sales
May 23 New Home Sales
May 27 Memorial Day – Markets Closed
May 28 Consumer Confidence
May 30 Q1 GDP [2]

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May 2- 3, Philadelphia, PA Investing Fundamentals Workshop
May 17- 18, Birmingham, MI Strategies for Growth Workshop
May 18, Washington D.C. Market Drive
May 31 – June 1, Austin, TX Strategies for Growth Workshop
May 1, 9:00 a.m. – 10:30 a.m. (ET) Active Trader Webcast
May 3, 12:30 p.m. – 1:30 p.m. (ET) Portfolio Management Webcast
May 3, 3:30 – 4:00 p.m. (ET) Options Week in Review
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Mon-Fri, 2:30 p.m.-3 p.m. (ET) Mid-Day Movers w/Lichtenstein
Mon-Fri, 3 p.m.-5 p.m. (ET) Market On Close

Big Retailers, Multinationals on Earnings Docket in May

Speaking of earnings, there was quite a bit of nervousness and excitement heading into the season, but with a wave of generally positive results, the tone has apparently turned more confident.

Q1 earnings opened with a mixed picture from big banks like JPMorgan (JPM), Wells Fargo (WFC) and Bank of America (BAC), among others. They were followed by generally positive reports from companies in other sectors like Netflix (NFLX), Coca-Cola (KO), Twitter (TWTR), Verizon (VZ), United Technologies (UTX), and Procter & Gamble (PG), many of which brought better-than-expected results and improved guidance, which may signal they expect to see more strength in the economy. Boeing (BA), however, which has been grappling with fallout from the 737 MAX issues that have grounded the planes, missed the mark.

In the month ahead, investors can look for more major earnings reports in a variety of sectors. Chinese online retail giant Alibaba (BABA) and multinational tech firm Cisco (CSCO) are scheduled to report earnings May 15. Retail leader Walmart (WMT) reports May 16, perhaps shedding light on how both the brick-and-mortar and online retail sector are faring.  Deere (DE) reports May 17, which could give investors a feel for how the global economy is affecting multinational companies.

Some companies have provided nice forward-looking pictures during their earnings calls. Twitter’s (TWTR) and Facebook (FB) results were potentially a good sign for social media companies that have been struggling. Lockheed Martin’s (LMT) results and forecast might mean other Industrial companies are also thriving.

One thing to consider thinking about, however, is that earnings to date are still down from a year ago, even if most have surpassed the Street’s expectations. Those expectations had been falling since last summer, so the bar has been set pretty low for many companies. The point is, earnings beats are nice, but not necessarily a reason to get carried away with enthusiasm.

Jobs Picture Improved in March, But What About April?

On May 3, investors will learn whether the glowing March jobs picture rolled into April. After a weak showing in February that raised fears of an economic slowdown, job creation bounced back in a big way with 196,000 jobs created in March. That was about 20,000 above expectations, and way above growth of 33,000 in February. Average hourly wages grew 3.2% year-over-year last month, another sign of possible economic strength, while the overall unemployment rate stayed at 3.8%, near 50-year lows.

When the April jobs report comes out, it may be worth seeing if manufacturing and construction jobs show any gains. Growth there has been stagnant the past couple months as business and professional services and health care led the way.

Investors might also want to consider keeping an eye on rising crude oil prices, which climbed above $65 a barrel for West Texas Intermediate toward the end of April. Tightening supplies are one factor driving prices higher, but oil prices also got a lift when the U.S. announced the end of sanctions exemptions for importers of Iran oil. While the rising oil prices haven’t had too much negative impact on transports, with the Dow Jones Transportation Average ($DJT) making steady gains through most of April, it may be worth monitoring.

IPO Market Gaining Momentum 

In the second quarter, the market for initial public offerings (IPOs) picked up the pace from a fairly sluggish first quarter as Lyft (LYFT), Levis (LEVI), Pinterest (PINS) and Zoom Video Communications (ZM) opened to public trade, with Uber announcing plans to follow suit. While LYFT plunged below its IPO price by its second day of grade, PINS and ZM skyrocketed out of the gate, with both remaining in the green by late April. LEVI is also still in the green, but it’s been trading with a bit more volatility.

As we anxiously await news on a proposed UBER IPO day, investors can continue to gauge whether there is an appetite for newly-public companies with the planned launch of companies like Beyond Meat, a vegan protein company valued at $1.2 billion at the high end of its proposed price range. It should launch in early May under the ticker BYND.

SciPlay is another expected IPO in the upcoming month. As the social gaming unit of Scientific Games, it offers casino-like mobile games. Shares will trade under the ticker SCPL. The company’s price range of $14 to $16 values it at up to $1.9 billion. Other IPOs investors may see in the next month, according to Renaissance Capital, include: So-Young International, Yunji, TransMedics and Trevi Therapeutics.

Keep in mind that while it may seem like enthusiasm is growing for IPOs, these investments do carry risk as companies new to public trading find their place in the market. They can offer significant gains in a short period of time, but they can just as easily result in losses. Consider a company’s overall value and potential growth, not just it’s brand name, when you are choosing whether to buy shares of an IPO.

Geopolitical Loose Ends

While the U.S. and China have yet to come to an official resolution on tariff issues, the two countries appear to be making enough progress for this issue to have drifted to the background of investor concerns this month. Moving forward, however, a new tariff conflict could be brewing on the horizon.

Earlier this month, the U.S. has threatened tariffs on the European Union for roughly $11 billion in response to what it says are damages from subsidies to Airbus. So far, the issue has been fairly muted, but if things get more tense, it could conceivably have an impact on some of the multinational U.S. companies that sell products in Europe. These include pharma, agriculture, machinery, and aircraft makers. There’s also a big intellectual property trade.

Good Trading, 



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