April 20, 2016

Stocks opened higher again this morning (Dow 40 pts; SPX .2%). Energy, healthcare and tech sectors are leading the way. The defensive sectors (staples, utilities, telecoms) are lagging. Europe is poised to close higher as well. WTI crude oil is trading flat around $41/barrel (remember, oil bottomed at $26/barrel in early February). Bonds are selling off as yields head a bit higher (5- and 10-year Treasury yields are 1.26% and 1.78%, respectively). 

I’ve pieced together some tidbits from recent earnings announcements. L’Oreal, the French cosmetics company, said strong North America sales (to consumers) helped them beat first quarter earnings estimates. Overall cosmetics sales rose about 4% in the quarter. Hong Kong and Brazil were down, but most of the rest of the world saw increasing sales. The company’s profit margins are expected to increase this year. Goldman Sachs (GS) said its first quarter revenue plunged 40% y/y and the company is now engaged in massive cost-cutting. Trading revenue fell 37% and investment banking fell 23%. Netflix (NFLX) reported a good quarter, but the stock tanked when management handed out June quarter guidance: new US web video customers are expected to drop 45% y/y. UnitedHealth (UNH) beat Wall Street estimates, reporting revenue and earnings growth of 25% and 24%, respectively. Management says the company will drop out of most states’ Obamacare exchanges.

Intel (INTC) reported first quarter earnings (up 3% y/y) ahead of expectations but revenue (up 7% y/y) roughly in line with estimates. None of that mattered. Management reduced second quarter revenue guidance to about $13.5bil vs. Wall Street’s forecast of $14.2bil. The downturn in PC sales is apparently more acute than expected so far this year. (This is the fifth consecutive year of unit sales declines for PCs). In addition, the company announced a huge restructuring program that will end up eliminating 11% of its workforce, and refocusing effort on chips for high end servers and connected devices (data center & “cloud” stuff). I think Bloomberg got it right when quoting an analyst: “It’s a lot to absorb.” The stock fell 2.5% immediately after the announcement, but that loss quickly disappeared this morning.

So far, 69 of the S&P 500 companies have reported results. About 58% of those beat revenue expectations and 84% beat earnings expectations. It seems clear that Wall Street got too pessimistic in the run-up to earnings season. That said, I should acknowledge that no energy sector companies have yet reported. 

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