After a slow month of earnings reports, earnings season kicks off this week and will provide a lot of direction for the overall stock market during the second half of the quiet summer months.
With the major indices hovering near all-time highs, it is very important that we see a positive earnings season. The ongoing trade war between the U.S. and China will continue to cast doubt on the global economy, but the real possibility of the Federal Reserve will but rates in the near future has fueled the bull market to new highs and a strong earnings season will help push the market even higher as we head into the latter part of the year.
Overall economic conditions remain upbeat in the U.S., and while the last earnings season was positive, it did show that corporate earnings growth has slowed, and that will be in focus this earnings season as well.
There remains a lot of uncertainty in the market at this time, and Wall Street will need to see strong numbers to justify pushing the market higher in the second half of the year. This week we will get some insight into what to expect as the new earnings season officially gets under way.
JPMorgan Chase (JPM)
Mega bank JPMorgan Chase (JPM) will officially launch the new earnings season when it reports before the market open Tuesday. The bank is expected to report earnings of $2.50 per share but the street has a higher number in mind with a whisper number of $2.55 for the quarter. The financial sector does have some negative exposure to falling interest rates, but if lower rates have the desired impact of spurring economic growth the sector will benefit from a stronger economy and that is why bank stocks like JPM have remained strong despite the growing expectations of a future rate cut. During the same period last year JP Morgan earned $2.29 per share and looking ahead analysts forecast the company to grow earnings by 5.8% per annum over the next five years. The stock is trading at just 12 times earnings, so there is value to be found with JPM trading at $113.93 with an average price target of $121.60.
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E*Trade (ETFC)
Brokerage firm E*Trade (ETFC) is more interest rate sensitive than you may think, with interest income accounting for around 70% of the company's valuation and more than 3 times as large as its commissions. With rates expected to fall, ETFC may have a hard time gaining momentum unless the company is able to deliver a very strong set of quarterly numbers. E*Trade reports its second-quarter numbers after the market close Thursday with the consensus calling for earnings of $1.09 per share on sales of $762.1 million. During the same period last year the company earned $0.95 per share and had revenue of $710 million. The company is expected to grow earnings 10.8% this quarter and looking ahead analysts forecast annual earnings growth of 7.5% over the next five years. The company has posted positive earnings surprises the last 13 quarters, and the street expects another positive surprise with a whisper number of $1.11 for the recent quarter. Analysts who cover the stock continue to see a lot of upside in ETFC shares. ETFC trades at $45.64 with an average price target of $54.25.
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Netflix (NFLX)
Streaming giant Netflix (NFLX) is a member of the FAANG stocks that drove the Nasdaq in recent years. After years of strong gains, NFLX has been sideways since last summer with shares trading in a tight sideways pattern in the upper end of the stock's 52-week range. Valuation is a concern. NFLX currently trades at 129 times earnings, and 61 times future earnings. While the valuation is certainly high, Wall Street is willing to buy into the stock at the current level because of the company's strong earnings growth, but shares are priced for perfection and there is always the risk of a big downturn on any signs of weakness, whether the weakness shows in terms of an earnings miss, or weaker than expected subscriber growth numbers for the quarter. Netflix has enjoyed strong member growth as "cord cutting" increased, and the company's focus on building a strong library of original programming has helped boost member numbers both domestically and internationally. International growth has advanced much greater than expected, and Wall Street will want to that trend continue. NFLX has a high valuation, but with earnings expected to rise 49% annually over the next five years there is still plenty of upside. Of course, the stock is currently priced for perfection so shareholders should be aware of the potential downward swing that could result from any sign of weakness. NFLX's results can ripple across the entire NASDAQ so there is a lot on the line with each quarterly report. NFLX trades at $364.00 with an average price target of $408.14.
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Alcoa (AA)
In the past, aluminum maker Alcoa (AA) was considered the ultimate bellwether stock. While the company's quarterly report is not viewed with as much importance as in the past, Alcoa's results are still very important. Aluminum is used in so many different sectors including construction, homebuilding, auto and aerospace markets… just to name a few. Steel and aluminum sectors have both been primary weapons in the trade war between the U.S. and China, with President Trump slapping big tariffs on both. Alcoa has traded steadily lower since the start of 2018 and the company needs to deliver solid numbers for Wall Street to turn bullish on the stock at this point. There is a lot of negativity priced into AA which is now trading at just 11 times future earnings. The low valuation is not enough to bring enthusiasm back into the stock unless Alcoa can show Wall Street better earnings performance. Profits are expected to fall 88% during the current year, and by 15% per annum over the next five years. There is a lot of negativity already priced into the stock, so any signs of strength could push shares higher. Alcoa is expected to report a loss of 34 cents per share when it reports Wednesday afternoon but the street expects a smaller loss with a whisper number of just 24 cents. Alcoa's report does paint a picture of the overall economy so it is important to pay attention to, and a strong reading could push the overall market even higher. Analysts who cover the stock are bullish and see a lot of upside potential. AA trades at $23.13 with an average price target of $38.50.
