Market Commentary 7-19-13

Investors shifted their focus this week from comments made by the Federal Reserve members to corporate earnings as several companies reported earnings this week.  The earnings were generally favorable, helping the S&P 500 close higher 4 of the 5 days this week.  Below is a quick recap of some of the earnings announcements that took place this week:

Citigroup (C) kicked off this week’s earnings announcements.  The company surpassed analyst expectations by posting a 42% increase in their profits from this time last year.  This was attributed to Investment Banking gains, as well as a large decrease in losses on unwanted assets which hurt their bottom line the past few years.  Citigroup posted $1.25 per share in earnings, surpassing the average analyst expectation of $1.18 per share.

Bank of America (BAC) also surpassed analyst expectations, posting a 63% increase in earnings year-over-year.  This was mostly attributed to its cost-cutting measures it put into place a few years back, as well as its strengthening credit.  CEO Brian Moynihan stated that he will eliminate another $8 Billion in costs by the end of 2014.  BAC’s provision for credit losses fell 32% from a year earlier, well below analyst expectations.  All in all, BAC posted earnings of $0.32 per share, surpassing the average analyst expectation of $0.19.

Intel (INTC) matched analyst expectations, posting $0.39 per share.  However, the company lowered its earnings guidance for the third quarter, citing expectations of further decreasing computer sales.  The company also acknowledged that longer-term, while computer demand may not increase, they are working to grow through other avenues such as smartphones and tablets, many of which do not currently use Intel products.  Given Intel’s positioning as a market leader, innovator, and company with a large amount of cash, we think that they have the ability transition into the smartphone/tablet space nicely.  It will be interesting to see how the company moves forward from here.

Microsoft (MSFT) missed analyst expectations on weakening demand for PCs that run Windows, posting earnings of $0.66 per share (compared to the $0.75 per share estimate).  The company acknowledged that it needs to, and will attempt to, focus more on the smartphone market, as sales of their tablets are not doing as well as they had originally hoped.  There also was a weakness in XBOX 360 sales (games and console) as consumers are backing off purchases as they await the new XBOX ONE, which is being released in November.  MSFT has said that it has a very large number of pre-orders for the console.  We will see how the sales play out at the end of 2013.

General Electric (GE) surpassed analyst expectations, posting $0.36 per share.  This was higher than the $0.35 per share that analysts had predicted.  Shares increased nicely today, as the company stated the demand for jet engines and oil and gas drilling equipment has driven their order backlog to a record high.  CEO Jeff Immelt also noted that the profit margin of its industrials unit grew, and is poised to continue expanding.

So far this quarter what we have seen is quite the reversal from what we’ve generally seen in the past few years.  The financial sector (i.e. WFC, MS, GS, C, BAC, GE) posted stronger guidance and improving earnings while the tech sector (i.e. GOOG, INTC, MSFT) all cited weaknesses in at least one aspect of their business.  The financial sector is getting some wind at its back, while the tech sector’s growth seems to be facing headwinds going forward.  We will continue to monitor these developments.

As of this morning, 72% of the S&P 500 companies that have reported earnings surpassed analyst expectations, while about 53% have beaten revenue estimates.  It is also worth noting that, in the week ending July 10th, mutual funds that invest in US shares saw a $4.55 billion inflow, breaking the seven week streak of outflows.  This could be the beginning of the rotation out of bond funds and into stock funds that we predicted, as investors are turning to equities, as bond yields still remain low.

Next week is a big week for corporate earnings announcements.  A small list of companies reporting are: McDonald’s (MCD), Apple (AAPL), United Parcel Service (UPS), Freeport McMoran Copper (FCX), AT&T (T), PepsiCo (PEP), Ford Motor (F), Boeing (BA), Caterpillar (CAT), General Motors (GM), Starbucks (SBUX), and Amazon (AMZN).