Has Catalyst Arrived? Home Depot, Walmart Crush Earnings Expectations As Retail Sector Keeps Impressing

Key Takeaways:

  • Walmart WMT , Home Depot HD earnings show retailers thriving during crisis
  • S&P 500 continues to close in on record highs as Nasdaq NDAQ posted 33rd of year Monday
  • Volatility has eased to near levels last seen in late February

Close but no cigar—that’s the summary of the S&P 500 Index (SPX) action Monday. Nice rally, but the SPX finished a few points shy of the record closing level of 3386.

Some say the market might need a new catalyst to close above the old record. Well, this morning could have brought that in the form of very solid earnings from two of the biggest U.S. retailers—Walmart (WMT) and Home Depot (HD). It looks like we’ll have an opportunity here and the market could flirt with that record high at the open.

A new high close for the SPX—if it happens—is always meaningful. However, some might say that’s a little less true this time because part of it remains, where else can people go to put their money? Low rates and lack of yield anywhere else has steered many people into stocks, which probably isn’t news to anyone after all this time.

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The “new-high” media coverage has been breathless, but is it warranted? After all, the SPX is just a number. For many, the larger issue is what a new high in the broad-based benchmark says about the state of the recovery, investor sentiment, and the look ahead to what will hopefully be greener pastures in 2021. Will we get there this week? Perhaps, but then what?

Obviously, people are trading thousands of different stocks, not just the index, but caution could be creeping in at a higher level as the SPX approaches this area up around 3390, after bottoming below 2200 intraday less than five months ago. That didn’t stop the Nasdaq (COMP) from notching another record high on Monday—its 33rd of 2020.

With headlines focused on record highs, some investors might be worried about whether things have come too far, too fast. As we noted yesterday, a few technical indicators point toward overbought conditions.

And then there are fundamentals. We might need a new fundamental catalyst to take things higher with earnings season just about over.

Walmart, Home Depot Bring Home the Q2 Bacon

WMT just crushed it, with earnings and revenue that easily topped Wall Street’s expectations.

One really amazing aspect of WMT’s earnings came on the e-commerce side, which nearly doubled with a meteoric 97% rise in the U.S. during the quarter. U.S. same-store sales rose 9.3%, a huge amount for a company that’s so well established.

All this points to WMT handling the crisis very well with its online capabilities, curbside pickup, supply chain strategy, and product mix. It also might have benefited from being considered an “essential” business that was allowed to keep its doors open during the worst of the pandemic.

The solid WMT quarter also might reinforce ideas that consumers weren’t all in dire shape in Q2, despite so many people suffering job losses. The question is how the rest of the year might shape up for WMT and other big-box stores. WMT didn’t offer guidance, and that might be why shares pulled back a bit after initially rocketing higher in pre-market trading. Their call is probably the place to check for investors who want to hear more about the outlook for retail.

Home Depot (HD) was the other big retailer with impressive earnings this morning, and in its case, investors rewarded shares with 2% pre-market gains. Earnings and revenue easily exceeded the Street’s expectations, and U.S. same-store sales rose an astonishing 25%. People have time—that’s what it comes down to. People had an extra hour in their days thanks to not commuting, so it looks like they used it to start all those home projects they’d been putting off.

Once earnings are out of the way, the “dog days of summer” could help volatility continue its retreat. The Cboe Volatility Index (VIX) has been tiptoeing toward the 20 mark in recent weeks, edging its way down as company news goes into a lull. It recently traded below 21.5, a level it last saw in February (see chart below). That being said, an absence of corporate and Fed news could leave more space for geopolitical noise to get peoples’ attention.

An Earnings Post-Mortem, and a Look at 2021 Optimism

Earnings were better than expected in Q2, with about 83% of companies reporting a positive surprise, according to research firm FactSet. Still, the forward price-to-earnings ratios are out of whack vs. historic norms for just about every sector. This could be explained partly by the current low interest rates and the Fed’s reluctance to raise them for what looks like years ahead. It also might be based on ideas that things could get better in 2021 as vaccines potentially come into use, though there’s no certainty there, of course.

A lot of analysts have basically washed their hands of 2020 earnings and have their eyes on next year’s possible results. For calendar year 2021, analysts predict S&P 500 earnings growth of 26.5%, according to FactSet. If that’s the case (and we’re a long way from finding out) it could potentially help push valuations closer to what people are used to. However, it’s not likely to take the P/E down too much.

Right now, the forward 12-month price-to-earnings level is around 22, vs. the historic average of 15, FactSet noted. Even if 2021 earnings grow by FactSet’s predicted 26%, P/E would be around 18, based on where the SPX is now. And that’s if the SPX spends the next year marching in place, which investors know seldom happens.

Long story short: It looks like the SPX has done a really good job over the last six months building in an optimistic scenario. However, if things don’t go well with the pandemic, or if the U.S. election sparks controversy, or if China trade relations worsen, or if a whole bunch of other things happen, those overbought technicals might start looking like they had some merit.

We’ll have to watch and wait, but all of this is more reason investors need to be careful about their portfolio balances and not let any particular investment area get over-stretched beyond their individual comfort levels.

From Peak to Near-Peak: Tomorrow marks the six-month anniversary of the SPX posting its all-time high close of 3386. The index has been flirting with that mark the last week or so, which raises the question how did we get here? In other words, it might be helpful to look at which sub-sectors of the S&P performed best since the pre-pandemic high, and which did worst.

It probably won’t shock anyone to hear that over the last six months, the best two S&P 500 sub-sectors were Internet Retail (up 40.4%) and Technology/Hardware/Storage (up 36.6%). Companies in the gold business also did just fine in these times of concern, rising 36.1%. Air Freight & Logistics and Interactive Home Entertainment rounded out the top five, according to research firm CFRA.

The worst performers included a 58.6% drop for Oil and Gas Drilling, and a 53% decline for Department stores. The department store sector comes into the spotlight this week as many retailers report earnings, so we’ll see if the hard times continued as reopening got underway across much of the economy. Mortgage REITS, Textiles, and Airlines were the other worst-performing sub-sectors since February.

Networking Opportunity? NVDA About to Report: Any list of the year’s top performers so far has to include the semiconductor space, and few companies have done as well in the market as Nvidia NVDA (NVDA). Shares of the company—expected to report tomorrow after the close—were up 107% year-to-date as of earlier this week. In one sense, it’s switched places with competitor Advanced Micro Devices AMD (AMD). Shares of AMD aren’t exactly stragglers, of course, up 79% so far this year. However, last year it was AMD that went up triple-digits while NVDA investors had to settle for a mere double-digit gain.

Basically, these and other chip stocks continue to benefit from people working at home. That includes many peoples’ kids, stuck doing school remotely now that the academic year is underway. This raises the need for data, web services, and internet storage. A lot of other things are contributing to NVDA’s market success, including excitement about the recent closing of an acquisition that analysts believe might help its networking capabilities and troubles at competitor Intel INTC (INTC). The company is also known as a leader in the graphics processing unit (GPU) business. GPUs are specialized electronic circuits used extensively by the video game industry and in some business applications.

Caution Flag: One thing to keep in mind heading into NVDA earnings—something you often see for any company that’s been going gangbusters in the market—is that any kind of miss, either on earnings and revenue or in a specific business area, might set NVDA shares up for some softness. The market is basically pricing in perfection from this company and the sector in general, and you can see how investors punish firms that don’t meet expectations (check out INTC’s plunge last month after earnings). If you’ve owned NVDA during this amazing rally, good for you. Just understand that although the company is doing well, the share price also reflects optimism for the future in a sector that’s had its ups and downs lately.

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

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