A soft Retail Sales reading and a positive start to bank sector earnings provides the backdrop for today’s session.
On the data front, this morning’s Retail Sales reading came short of estimates, but the modest favorable revision to the prior month’s reading and positive reading for this month are nevertheless welcome. The negative Retail Sales readings the last couple of months were surprising given the energy windfall that had strengthened consumers’ wallets. But today’s reading can be interpreted to mean that the weather explanation made the most sense in explaining those earlier retail sales and other soft economic readings.
These weather-induced soft readings notwithstanding, the overall outlook for the U.S. economy remains favorable even as questions remain about the rest of the world. It is this growth divergence that is behind the strong U.S. dollar that has emerged as a big headwind for corporate profits. This morning’s Johnson & Johnson (JNJ) earnings report sheds plenty of light on this issue.
Retail Sales aside, we saw J.P. Morgan (JPM) and Wells Fargo (WFC) kick-off the Q1 earnings season for the bank sector this morning. These stocks have underperformed the broader market indexes this year as persistently low treasury bond yields continue to weigh on the banks’ operating profitability. Both were able to come ahead of expectations in their Q1 results, though J.P. Morgan’s results show more resilience, on balance.
Trading revenues were a big contributor to the J.P. Morgan quarter, with the bank bringing in +9% more revenues from its trading operations. The bank had guided towards better trading results, which likely provides a favorable read-through for Goldman Sachs (GS), which also has a big fixed income, currencies and commodities trading franchise. The mortgage business did better than the year-earlier period as well, and we saw this in play with the better-than-expected Wells Fargo results.
Including this morning’s earnings results, we now have Q1 results from 29 S&P 500 companies that combined account for 9.6% of the index’s total market capitalization. Total earnings for these 29 companies are up +6.3% on +5.5% higher revenues, with 82.8% beating EPS estimates and 37.9% coming ahead of top-line expectations.
In terms of growth rates and beat ratios, this is better performance than we have seen from this same group of companies in recent quarters. The sole exception is the revenue beat ratio, which is weaker than what we have been seeing in other recent periods. But it’s way too early in the reporting cycle to start drawing conclusions about this earnings season.
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Sheraz Mian on Earnings and Why U.S. Investors Shouldn't Fear a Strong Dollar
