On Monday, the market completely ignored the Helsinki summit; instead, it focused on economic data and braced for more corporate earnings. With 60 members of the S&P 500 scheduled to release results this week, we’ll get a better glimpse into how the second half of 2018 might fare.

Coming into the week, the scoreboard is very impressive:

• 30 companies reported
• 87% beat on revenue
• 87% beat on earnings
• Average revenue growth 8.1%
• Average earnings growth 21.1%

Right now, Consumer Discretionary (XLY) results are the biggest highlight with the average beat on earnings 15% better than consensus. Consumer Staples (XLP) earnings have come in at an average of 4.1% better than consensus, along with Technology (XLK), 3.1% better than expected. The big surprise yesterday morning was Bank of America (BAC), which beat on revenue and earnings.

Lending Money…How Novel!

I was very impressed with how Bank of America did so well – the company actually got back to the business of lending. Loan growth was faster than deposits.

• Deposits +3%
• Business +5%
• Commercial +5%
• Consumer +6%

Credit and debit card use improved 7.7% from a year ago.

Bank of America shares were up 4.3%, and the S&P Financials sector (+1.7%) joined consumer discretionary names as the only two in the plus column.

S&P 500 Index	-0.10%
Communication Services (XLC)	-0.29%
Consumer Discretionary (XLY)	+0.25%
Consumer Staples (XLP)	-0.47%
Energy (XLE)	-1.15%
Financials (XLF)	+1.78%
Health Care (XLV)	-0.61%
Industrials (XLI)	-0.41%
Materials (XLB)	-0.80%
Real Estate (XLRE)	-0.55%
Technology (XLK)	-0.23%
Utilities (XLU)	-0.10%

Leadership Beyond Technology

On the other hand, tech stocks were mixed as investors focused on the also-ran names that have been under pressure over the past year, as anxiety grows over larger names that have been priced to perfection.

One of those names was Netflix (NFLX). Last week, shares were wobbly (downgrade), but yesterday they reported after the bell posting a miss on revenue while beating on earnings .Netflix’s new subscriptions came in on a million less than expected, and the stock was down big in after-hours trading. If these losses hold the share price, it will be down 18% (from a week ago) when trade begins this morning.

A big question for the market is what happens when the big five tech names hit a bump in the road.  Will buyers seek value in other tech names or other sectors?  Market breadth includes winners and losers, and volume and milestones suggest investors aren’t sure what to buy when big tech isn’t working.

I think tech investors will rotate into chip names and stocks such as Cisco Systems (CSCO), which oversold on speculation that Amazon (AMZN) will eat their lunch in 2019. I also think investors should look at industrials and consumer discretionary names.

Today, Jay Powell takes center stage with his testimony before Congress regarding the state of the economy. 

Federal Reserve

In advance of Jay Powell’s testimony to the Congress, the Federal Reserve sent an advance letter, outlining key aspects of the economy and policy. I’m most intrigued by the harsh burden of childcare keeping so many out of the workforce. Meanwhile, the Fed seems committed to remaining “accommodative.”

Monetary Policy Report July 13, 2018:

https://www.federalreserve.gov/monetarypolicy/files/20180713_mprfullreport.pdf

Labor

 The labor market has continued to strengthen. Over the first six months of 2018, payrolls increased an average of 215,000 per month, which is somewhat above the average pace of 180,000 per month in 2017 and is considerably faster than what is needed, on average, to provide jobs for new entrants into the labor force.

Inflation

Measures of longer-run inflation expectations have been generally stable.

Economic Growth

Gains in consumer spending slowed early in the year, but they rebounded in the spring, supported by strong job gains, recent and past increases in household wealth, favorable consumer sentiment, and higher disposable income due in part to the implementation of the Tax Cuts and Jobs Act. Business investment growth has remained robust, and indexes of business sentiment have been strong.

Financial stability

In the private nonfinancial sector, borrowing among highly levered and lower-rated businesses remains elevated, although the ratio of household debt to disposable income continues to be moderate.

Interest rate policy

Even with these policy rate increases, the stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

Workforce Participation

Other research suggests that increased opioid use may be associated with a lower prime-age LFPR, although it is unclear how much of the decline in the prime-age LFPR can be directly explained by opioid use or whether increases in opioid use are an indirect result of poor employment opportunities.2 Caregiving responsibilities play an important role in explaining why LFPRs for prime-age women are lower than for men, and they may play an increasing role in explaining declining prime-age LFPRs for men as well. As shown in figure C, roughly 15 percent of prime age women report being out of the labor force for caregiving reasons—by far the largest reason for prime age women to report not wanting a job—but this share has been fairly flat over time.

Today’s Session

Looks like a sloppy start to the session as investors digest a smattering of earnings results, which includes beats for Johnson and Johnson (JNJ), Goldman Sachs (GS) and United Health (UNH). 

I’m seeing solid pricing power and firm guidance, but there is still a sell-on-the news mindset. 

It’s important to keep an eye on bottom lines and not get caught in the angst of the masses.  Earnings season is tough, and this is when most investors take losses they regret later.

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