The General Market
Main U.S. Benchmarks End Flat
The week ended pretty much like the previous week with apart from trade policy worries, concern over monetary policy emerge. The losses in the consumer-discretionary and energy sectors offset a rise in staples and financials sectors.
Closing as of 07/20/2018
Previous week ending 07/13/2018
The Dow Jones Industrial Average shed 6.38 points (less than -0.1%) to end at 25,058.12. The S&P 500 Index finished Friday lower by 2.66 points (-0.09). Losses from the defensive sectors such as real estate (-0.9%) and utilities (-0.8%) negated the gains from the financials (+0.2%) and consumer staples (+0.6%) sectors. The tech-heavy Nasdaq Composite Index lost -5.10 points (-0.07%).
Performance by Sector
Of the 48 S&P 500 members that have reported Q2 results as of July 19, total earnings are up +23% on +10% higher revenues. The proportion of these companies beating EPS and revenue estimates is for far tracking above other recent earnings season.
The transportation sector had a strong showing with 33.33% of the sector’s total market cap in the S&P 500 index reported +22.4% and +9.5% earnings and revenue growth and all the companies beating EPS and revenue estimates.
Total earnings are up +20.9% on +5.8% higher revenues in the financial sector. About 80% of the 41.9% reporting beat EPS estimates and 86.7% beating revenue estimates. The sector’s earnings are expected to be up +24.2% from the same period last year on +4.1% higher revenues.
The total earnings estimate for the technology sector is +23.5% on +11% higher revenues, as compared to the +31.1% earnings growth on +13.1% revenue growth in Q1.
Other major sectors are expected to report strong growth in Q2. The energy sector (+136.9% earnings growth) leads all sectors followed by basic materials (+52.3%), industrial products (+25.3%), and retail (+18.3%). The autos and conglomerates sectors are the only ones expected to have lower Q2 earnings compared to the 2017 level.
On the overall, total Q2 earnings in the S&P 500 Index are expected to be up +20.4% from the same period last year on +8.3% higher revenues. Majority of the sectors is expected to have double-digit earnings growth.
For the week, the blue-chip index managed a +0.2% gain while the broader S&P rose less than 0.1%. The Nasdaq posted a less than -0.1% decline which ended a string of two straight weekly gains.
Trump Not Thrilled with Fed’s Rate Increases
During his CNBC interview with CNBC on Thursday, U.S. President Donald Trump said he is not happy with the central bank’s rate increases. However, he was “letting them do what they feel is best.” Trump ramped up the criticism on Friday via Twitter. He said a tighter monetary policy was punishing the U.S. by contributing to a stronger dollar.
Trump is Ready to Go 500
U.S. President Donald Trump made another threat on Friday to impose tariffs on $500 billion of imported goods from China. Trump issued the threat during an interview with CNBC.
“We’re down a tremendous amount,” Trump said in the interview, which was recorded on Thursday, about trade imbalances with China. “I’m ready to go to 500.” This latest tirade will further escalate the current trade clash with Beijing.
Netflix Shares Tumble
The shares of video-streaming giant Netflix Inc. (NFLX) tumbled -5.24% due to disappointing subscriber growth figures. NFLX already went down over 13% in after-hours trading on Monday after presenting their earnings report. The stock closed at $379.48 on Tuesday.
Netflix forecasted 6.2 million additional subscribers for the second quarter. However, actual figures showed only 5.2 million new subscribers. The global total is just over 130 million.
Google Faces Stiff Fine in EU
The European Union (EU) will slap Alphabet Inc.’s (GOOGL) with a record 4.3 billion euros ($5.00 billion) over its Android system. Bloomberg reported the news on Wednesday.
EU Competition Commissioner Margrethe Vestager called Google CEO Sundar Pichai late Tuesday to set a meeting. The EU antitrust enforcer is charging Google for using its dominant Android to marginalize rivals.
Transportation Sector Highlights
The Lifeblood of the Economy
The U.S. trucking industry in the U.S. moves more than 70% of the nation’s freight by volume. In recent months, it has been witnessing significant demand. Truck transport is a “derived demand” industry. Truckers rely on the demand for the products that trucks haul. More importantly, trucking serves as a barometer of the U.S. economy.
The demand for carriage is increasing simultaneous with the continuing growth of the U.S. economy. There is momentum and the industry looks capable of sustaining it in 2018.
There are three factors working in favor of the trucking industry: 1) the U.S. economy is on solid footing; 2) current capacity crunch and severe shortages drivers, and 3) corporate tax cuts.
The American Trucking Association (ATA) predicts persistent growth for truckers driven by manufacturing, consumer spending and international trade over the next 12 years.
The trucking industry is a major earnings contributor to the Transportation sector. Their total Q2 earnings can rise up to 12.9% from the same period last year on 8% higher revenues. This would follow 21.3% earnings growth in the preceding quarter on 9% higher revenues.
Three stocks popped this week and exhibited similar upward trends.
ArcBest Corp. (ARCB) $46.70 (+30.63% YTD)
From Monday’s closing of $43.30, ARCB climbed 7.85% to finish the week higher at $46.70. The stock price rose in each of the trading sessions since the start of the week.
ArcBest is a freight transportation services and solutions provider across the United States and internationally. The company is scheduled to release its second-quarter 2018 earnings results on July 31. Their earnings growth estimate for the current year is 120.3%.
Old Dominion Freight Line Inc. (ODFL) $149.10 (+13.34% YTD)
Old Dominion Freight Line Inc. is one of the leading companies providing LTL services. The union-free company’s coverage is national in scope and super-regional.
On July 26, Old Dominion will release its second-quarter 2018 earnings results. The expected earnings growth for the current year is 48.6%.
ODFL declined 3.60% on Monday to $142.95 but steadily went up during the week. It closed 4.33% higher on Thursday at $149.15 before finishing the week at $149.10.
SAIA Inc. (SAIA) $78.15 (+10.46% YTD)
SAIA dropped 3.54% to $74.60 on Monday before perking up in the next three trading sessions. By Thursday, the stock priced was up 6.30% at $79.30. It ended -1.15% lower on Friday and settled at $78.15.
SAIA Inc. is also a leading LTL transportation company that provides a variety of trucking transportation and supply chain solutions to a broad range of industries. The company will present its second-quarter 2018 earnings report on August 1. SAIA’s expected earnings growth for the current year is 74.4%.
Healthcare Sector Highlights
‘BIG’ Pharmas Pledge Not To Raise Drug Prices
Merck & Co. Inc. (MRK) is the third major pharmaceutical firm that made a pledge to limit drug price increases in the United States. Novartis AG (NVS) and Pfizer Inc. (PFE) were the two companies firms that made the same pledge.
Merck will cut the price of Zepatier (for the treatment of Hepatitis C by 60% and reduce the price of six other medications by 10%. The company promised not to raise the average price of their drugs beyond the annual rate of inflation in the U.S. Merck will also continue to evaluate their portfolio to look for opportunities to further reduce costs.
Investors will now be closely monitoring the health technology space. Analysts forecast for the stocks of the 3 firms range from +23% to +44%. Health technology stocks can be boosted by this latest development.
Pfizer Inc. was the first major pharmaceutical firm to announce the deferment of price increases on multiple drugs. United States President Donald Trump confirmed through a tweet that he spoke with Pfizer’s CEO. The American President exhorted the company’s chief executive to reduce costs.
Trump’s tweet read, “Pfizer is rolling back price hikes, so American patients don’t pay more. We applaud Pfizer for this decision and hope other companies do the same.”
Merck & Co. Inc. (MRK) $62.52 (+11.11% YTD)
Pfizer Inc. (PFE) $37.33 (+3.06% YTD)
Novartis AG (NVS) $82.27 (-2.01% YTD)
Pfizer was the first
After Pfizer submitted to the pressure from Trump, Novartis AG followed suit this week. The Swiss drug company also heeded the warnings from Trump over price hikes. Novartis announced on Wednesday that it would not raise prices this year in the United States.
Novartis CEO Vas Narasimhan told Bloomberg, “We thought the prudent thing to do was to pull back on any further price increases in 2018 and evaluate as the environment evolve.”
Many in the U.S. have been complaining about the increasing cost of drugs in recent years. The pharmaceutical industry has been swamped with criticisms as well as heavy pressure from the White House. One of the major campaign promises of Trump was to lower drug prices. When he took office, he exerted unrelenting pressure on the big pharmas.
The big names in the pharmaceutical industry will release their Q2 earnings report next week. Among them are Allergan PLC (AGN), Eli Lilly & Co. (LLY), GlaxoSmithKline PLC (GSK) and Merck.
Information Technology Highlights
Prime Day 2018 – The Biggest in the History of Amazon
Amazon.com Inc. (AMZN) $1,813.70 (+55.09% YTD)
AMZN closed at a record high of $1,843.93 on Tuesday day and boasted that its annual Prime Day is the ‘biggest in the history’ of the e-commerce giant. The company’s press release said that small and medium-sized businesses had sold more than $1 billion since the event started on July 16, Monday.
Amazon’s e-commerce dominance has forced rivals like Target (TGT), Walmart (WMT) and almost all other retailers to alter their business models. Amazon is also competing with Alphabet’s (GOOGL) Google, International Business Machines Corp. (IBM), and Microsoft Corp. (MFST) through its successful AWS cloud hosting business.
The Race to $1 Trillion
Further, Amazon is close to the heels of Apple Inc. (AAPL) and their race to become the first company to reach $1 trillion in market value. As of Thursday, Amazon’s market capitalization is worth $879.7 billion versus Apple’s $943.1 billion. Google’s parent company, Alphabet, ranks third, followed by fellow tech giants Microsoft and Facebook.
Analysts still sees room for AMZN to further climb despite its meteoric rise in 2018 and achieving all-time highs. The road to a $1 trillion value must go through Apple Inc. remains atop the rankings in the road to $1 trillion value.
The market cap of the iPhone maker climbed as high as $920 billion last March. Some analysts expect Apple to surpass $1 trillion in 2019. However, Amazon might be the first to hit the $1 trillion milestone.
The WEEK AHEAD
The earnings season will shift to high gear next week with the heavier influx of companies presenting their second-quarter earnings. Over the past year, corporate earnings have risen more than 20%. In addition, recent economic indicators suggest slightly faster growth ahead with solid job growth and modest wage pressures.
Stock investors can combine a well-diversified fixed-income portfolio and choose from among a wide variety of equity investments. The mix should be aligned with one’s comfort level with volatility, time horizon, and goals.
The scheduled economic reports in the week ahead are as follows: the global manufacturing PMI indicators on Tuesday, durable goods orders on Thursday, and the second-quarter GDP growth on Friday.