EARNINGS SEASON IS GOOD ENOUGH

Major stock market averages opened higher this morning on some better than expected earnings reports (see below). The Dow is currently up 11 points, and the SPX is up .45%. The NASDAQ is up 1% in early trading. The communications services sector spiked 3% on the back of a much better than expected earnings report by Alphabet (GOOGL). On the other hand, industrial and energy sectors are down on the day. Commodities are mixed: gold and iron ore are in the green but copper and oil are down. WTI crude oil is back down around $55.90 per barrel. Bonds are trading slightly higher this morning. Yields edged lower right after the GDP report (see below).

Gross Domestic Product (GDP) posted 2.1% growth during the second quarter, a little better than economists were expecting. US economic growth was propped up by a very strong 4.3% gain in consumer spending, and also by 5% growth in government spending. On the other hand, private domestic investment, which refers to corporate spending, fell 5.5%. That’s the worst decline since the end of 2015, and it shaved a full percentage point off of GDP. For the better part of a year now, we’ve seen US and international economic growth slowing, and the big question is whether we’ll experience a hard landing (i.e. growth slowing to less than 2%) or a soft landing (growth stabilizing around 2% to 2.5%). Thus far, evidence is leaning toward the soft landing scenario. The setup reminds me a lot of 2015.

Nearly 220 of the S&P 500 companies have reported quarterly results. About 59% of them have beaten revenue forecasts, and 78% have beaten profit forecasts. Aggregate earnings are on track to grow 4% y/y. While that’s much slower than growth achieved in 2018, it’s an improvement from the prior quarter’s 1.4% growth. So far results are good enough to convince investors that we’re not headed into an economic recession.

Alphabet (GOOGL) reported strong second-quarter results, taking equity traders by surprise. Cash flow improved and good cost control was evident. Overall advertising sales rose 16% from year ago levels. Cloud software & consumer hardware sales rose 40%. Investor reaction was immediately positive because it now seems like very disappointing first quarter results were an aberration. In addition, the company announced an increase in its stock buy-back program to $25 billion. The stock is up about 10% this morning.

Starbucks (SBUX) also reported a great quarter, beating Wall Street estimates for revenue and earnings. The company’s global same-store-sales grew an incredibly fast 6%, the best in three years. The stock is up nearly 7% this morning to an all-time high.

Intel (INTC) reported second-quarter results confirming a slowdown in the semiconductor sector. But things were not as bad as expected Wall Street expected. Revenue fell 3% from year-ago levels and profits were up at 2%. That may not sound encouraging, but analysts were really concerned about the negative impact from the trade war and global slowdown, as well as tougher competition from AMD. The stock is down about .7% this morning.


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