On Tuesday morning (4/24 at 10:44 AM EDT), Bloomberg announced that the morning’s excellent earnings reports and price jumps by Caterpillar and United Technologies were the bullish signs investors were waiting for. Up to this point, excellent earnings reports were often accompanied by lackluster price moves. Yet, here were two major industrials seemingly offering the proof that the market’s bullishness was intact. However, by day’s end, Bloomberg would make a 180 turnabout, strengthening the concerns that all is not well with the stock market – perhaps even with the economy.
Disclosure: Author holds only cash reserves
What happened to change Bloomberg’s view?
This quarter’s earnings reports have been looking like invitations to sell, regardless of the results. The source of concern underlying the negativity is likely the numerous disappointments, misses, hiccups and uncertainties coming from business outlooks, economic reports, consumer activity, and political confusion.
Very important: Media reports, in their simplistic search for the one troubling reason (e.g., the 10-year UST hitting 3%), are missing the serious combination of negative factors at work.
The Dow Jones Industrial Average’s 30 companies are now halfway through this quarter’s earnings reports. The troubles began right away with the first company report from JPMorgan Chase on April 13. (For an explanation of what went wrong, see my 4/16 article, “JPMorgan: Earnings Up, Stock Down – A Sign Of Stock Market Weakness?”)
Last week’s seven reports and lackluster stock reactions showed the JPMorgan results were not an anomaly. (For more, see my 4/22 article, “Earnings Reports Don’t Support Hopes For A Bull Market Restart – Yet.”) On Monday (4/23), The Wall Street Journal discussed this growing, worrisome view in “Earnings Are Strong, but Rewards Are Scarce.”
Then came this important week. The first seven reports (with five more to come) ramped up the concerns, especially because of the disappointing outlooks from Caterpillar and United Technologies. These successful industrial companies had become a last hope for those who believed the 1st quarter 2018 earnings reports would reignite the 2017 bull market.
There was a moment of enthusiasm when the PR releases revealed excellent earnings numbers. However, when managements spoke later, they delivered downer outlook messages. Two Tuesday (4/24) Bloomberg articles, co-written by the same reporter, captured the happy, then sad, reactions. (Underlining is mine)
Bloomberg (10:44 AM EDT) – “Stock Market Has Saving Grace Right Now in Industrial Earnings”
Caterpillar Inc. is leading industrial companies toward something that equity bulls have been hoping for: Better-than-expected earnings and a rally in share prices.
It’s the kind of reaction that has been mostly elusive since banks kicked off the reporting season about two weeks ago. Profits are running ahead of analyst estimates, but stocks are getting no reward. And when they miss, [as] chipmakers and consumer staples did, they’re punished even harder.
[Companies that produce heavy equipment and machinery] buoyancy was on display Tuesday as Caterpillar jumped as much as 4.6 percent after raising its outlook for the year on continued strength for construction in North America and infrastructure in China. In aerospace, United Technologies Corp. boosted its forecast on the back of the “strongest first-quarter organic-growth rate” in seven years and the stock climbed as much as 3.1 percent.
Without industrials, it would have been another lousy earnings day, considering Google’s parent Alphabet Inc. fell as much as 4 percent despite better-than-expected profits.
Then, reality struck…
Bloomberg (4:02 PM EDT) – “Economy Fears Spark Stock Market Rout After Bonds Punch Through 3%”
Enter Caterpillar Inc., 3M Co. and United Technologies Corp., stalwarts of American industry that serve as bellwethers for key pieces of the global economy. Caterpillar had its biggest decline since 2016, and 3M plunged the most in 12 years, with both warning that rising costs and tepid demand might hurt profits as the year goes on. Wall Street took the news as a warning that the worldwide economic expansion might be near its peak.
“It means economic growth might not be what the administration is saying, that the tax cuts will pay for themselves because you’ll have increased revenue from higher GDP,” said Donald Selkin, New York-based chief market strategist at Newbridge Securities Corp. Everyone “is talking about the great earnings for the first quarter, but frankly every stock that has reported has done lousy.”
Earnings were supposed to act as a sort of reprieve for equity bulls who’d been struggling to pronounce the correction over and dead. But with almost a quarter of companies done reporting, and almost 80 percent of that share surpassing profit expectations, the results haven’t been a saving grace for investors.
In fact, analysts have cut their earnings estimates for the next year, adding fuel to speculation that the first quarter may mark the height of profit growth.
The bottom line
While Bloomberg jumped the gun in pushing the bullish button, its error was in assuming management’s earnings call would endorse the good earnings and price jumps. Instead, the future views were less robust, leading to the stocks selling off significantly.
Credit goes to Bloomberg for reevaluating its earlier beliefs and then changing the conclusions completely to match the facts. Unfortunately, that new view undermines the “great 1st quarter earnings will bring back the bull market” expectation. Therefore, holding cash reserves continues to look like a good investment strategy.