Gold Stars And Golden Arches: Metals, Biotech Shine; Earnings Season Rolls On

Key Takeaways:

  • McDonald’s, 3M MMM miss on earnings; Pfizer PFE beats
  • Senate Republicans unveil stimulus plan; debate ahead
  • Rest of FAANG companies report earnings later this week

As earnings season shifts into higher gear during this busy week, investors not only have quarterly corporate performance on their mind but also the congressional debate about another round of stimulus and a Fed meeting where market participants are likely hoping to hear that central bankers are willing to do more to help the beleaguered economy.

Things were mixed on the earnings front. Dow Jones Industrial Average (DJI) components McDonald’s Corp MCD . (MCD) and 3M (MMM) were down in pre-market trading after both companies’ earnings fell short of expectations. But Pfizer’s (PFE) shares were higher after it beat forecasts.

Golden Arches, Other Earnings, and Stimulus

Although same-store sales for MCD fell by more than 23% year-on-year, they did improve sequentially, and the fast-food chain did report better-than-expected revenue. The company fared better in the United States, where same-store sales fell 8.7%. Meanwhile, MCD’s drive through, delivery, and digital options helped cushion the blow, but fewer people going to work seems to have put a dent in breakfast sales.

MMM, which missed on revenue as well as earnings, was hurt by the coronavirus crimping demand for the company’s products. Surging demand for respiratory masks cushioned the blow but wasn’t enough to offset declines in demand for other products. 

On a brighter note, PFE—which has launched a late-stage vaccine candidate study with partner BioNTech (BNTX)—beat earnings estimates. Progress on that vaccine, as well as a late-stage candidate from Moderna (MRNA), have helped encourage investors hoping a vaccine will help the economy get back on track.

Progress has also been made on the government stimulus front, with Senate Republicans putting forth their version of another coronavirus aid package. But the plan doesn’t have universal backing and it seems likely the market may experience some volatility as details get hammered out.

On Monday, anticipation of more stimulus helped to boost equities after Treasury Secretary Steven Mnuchin said over the weekend that the $1 trillion Republican proposal would include a new round of $1,200 checks in August.

The stimulus plan comes alongside Federal Reserve stimulus that has helped the market recovery since its coronavirus-led low point in March. The Fed has said that aid needs to come from Congress as well as the central bank.

Gold Star for Tech Shares

After some choppy waters, investors are seemingly more optimistic on the tech-related stocks. The tech-heavy Nasdaq NDAQ (COMP) handily outperformed the other two main U.S. indices on Monday, and the Information Technology sector was the best performing of the S&P 500 Index (SPX).

Recently, it seems that we’ve seen some rotation out of tech-related stocks and into other equities. The sector may have also been susceptible to profit taking after a big run up, while some investors may have thought some of the names in the space got overvalued.

The gains in tech-related stocks come ahead of earnings from Apple AAPL (AAPL), Amazon AMZN (AMZN), Alphabet (GOOGL), and Facebook (FB) in the coming days. Even though the other FAANG name, Netflix NFLX (NFLX), disappointed investors, there may be some optimism that the others in the group will perform better earnings-wise and potentially issue more upbeat guidance.

Amazon’s shares in particular got some help Monday after analysts at four firms raised their price targets for the online retailing and cloud services giant.

Investors have gravitated toward tech-related companies because of their outperformance over many other types of firms during the pandemic, helping lead the stock market recovery after the coronavirus-sparked crash. But that trade may have run a good bit of its course, leading to some choppiness in tech-related names recently.

A Golden Opportunity

The market as a whole continues to grapple with rising coronavirus cases as well as tensions between Washington and Beijing.

Because gold tends to do well when investors want a vehicle that many consider to be a safe-haven buy, those fear factors have contributed to the precious metal rising to record territory, when not adjusted for inflation.

But those issues aren’t the whole story, as you might suspect when gold rises on a day when equities are also gaining ground and risk appetite seemed to be fairly healthy.

Ultra-low interest rates have been boosting gold’s allure because they reduce the opportunity costs of holding the non-interest-bearing precious metal. Also, a U.S. dollar that has been on a downtrend when compared with other major currencies has been helping gold. (See more on the dollar and gold below.)

That brings us to a question about how much of a warning sign gold might be flashing. It seems likely that the precious metal’s record run does have some bearing on underlying jitters in the market. But with another round of government stimulus expected, it seems that market participants are at least able to partially shrug off worries about the U.S.-China situation and the continuing pandemic.

Signs of this came from the Treasury market Monday, where government debt yields didn’t move all that much and from the Cboe Volatility Index (VIX), Wall Street’s main fear gauge, eased back, indicating less nervousness among traders and investors.

Are These Gains Durable? The latest durable goods data seem to be more evidence of a green-shoots economic recovery taking place. The overall figure was better than expected, showing 7.3% growth in June when a consensus had expected a 6.4% rise. While that represented a slowdown from the previous month’s jump of 15.1%, a key measure of business spending plans within the report accelerated. Core capital goods orders, or new orders for nondefense capital goods excluding aircraft, rose by 3.3% compared to the May gain of 1.6%. The biggest driver for June’s overall rise came from orders for transportation equipment, as a surge in motor vehicle demand more than made up for a sharp decline in orders for civilian aircraft.

Still Worth Tuning In: Later this week, the government’s first estimate of Q2 gross domestic product is widely expected to be bad. A consensus expects an annualized drop of 36.5% while the Atlanta Fed’s latest GDPNow estimate was for -34.3%. So it doesn’t seem like the question is “will it be bad,” it seems like more of a question of “how bad will it be.” The market has been on an uptrend even with these dire expectations built in. That’s largely because the market is forward looking and already ahead of the backwards-looking GDP report. However, if the number comes in quite a bit above or below expectations, that information hasn’t been baked into the cake. Such an event would likely move the market one way or the other, which is why Thursday’s GDP report is likely to be closely watched, even though the market is already braced for expected bad news.

Under A Microscope: In a similar fashion, the market pretty much has a clear idea that the Fed won’t change rates this week, but that doesn’t mean people won’t be tuning in closely for the central bank’s commentary. Not much has changed in the trajectory of the overall economic recovery since Fed chairman Jerome Powell said central bankers are “not even thinking about thinking about raising rates.” With the economy seemingly far from out of the woods, any argument about changing rates would likely skew toward the other direction, but official negative rates don’t seem to be in the cards either. Still, investors are likely to be riveted to what the Fed has to say on Wednesday. They’re probably going to want to hear more on policy makers’ outlook for the economy in light of the coronavirus resurgence, what the Fed is thinking about more stimulus either from itself or Congress, and what might be on its mind in terms of yield curve control.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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