The major financial market averages touched 2016 highs this week and some were not far from record highs as the first-quarter earnings season kicked off.
Both the Standard & Poor's 500 index and Dow Jones industrial average were poised to gain 1.7 percent and 2 percent, respectively, for the week. The S&P 500 is now 2.3 percent away from the high reached in May 2015.
This has occurred even though the International Monetary Fund cut its global growth forecast and the World Bank said loans were approaching near crisis levels. However, earnings reports from banking giants JPMorgan Chase and Citigroup that exceeded consensus estimates helped move the financial sector higher.
IMF report
Earlier in the week, the IMF released the April 2016 World Economic Outlook titled, “Too Slow for Too Long.” The downgrade in its forecast was due to the disappointing pace of growth that left the world economy more exposed to negative risks. Even though markets have recovered from the significant selloff, the IMF remains concerned that further bouts of volatility will feed through the real economy.
Crude oil surged higher Tuesday about 10:30 a.m. EDT (14:30 UTC) following a headline by Interfax that there was a conversation between Russian and Saudi Arabian oil ministers. It was speculated that both parties would push for a freeze on their respective oil production at the meeting in Doha, Qatar, this weekend.
Neither side confirmed a conversation took place.
Crude oil continued to sell off through Friday as inventory builds were worse than expected, according to weekly data, and expectations were lowered that anything meaningful would be resolved in Doha.
Uncertainty in the oil complex overshadowed positive Chinese data, which showed the country’s first-quarter gross domestic product was in line with expectations. This was the latest report indicating that Asia’s largest economy may be on the mend, erasing fears that helped send global markets sharply lower at the start of 2016.
Trading week ahead
Traders will be waiting for the outcome of the meeting Sunday in Doha of top oil producers, led by Saudi Arabia and Russia, aimed at trying to curb crude oil output, which is currently around 2 million barrels of excess oil per day.
A production freeze is very different from production cuts. Even if the nations decide on a freeze, production is still at record highs. Expectations for anything meaningful are quite low, and crude oil was selling off before the meeting.
If crude oil plummets, stocks could be under pressure when trade opens Monday morning. But investors should remember this is a process, not an event. The crude oil complex is one of the largest in the world, with many moving parts.
“After the dust settles around the news from Qatar, session ranges should continue to narrow, which will give comfort to those looking to put money to work," said Jeremy Klein, chief market strategist at FBN Securities. “My most reliable statistics suggest that ample capital sits parked on the sidelines, with the ability to drag the tape higher. Fund managers will re-engage with their portfolios as they drown in the deluge of earnings.”
Economic data will be relatively light, with housing and manufacturing at the forefront. Release of crude oil and natural gas weekly production levels will also be a tradeable event, especially following the Doha meeting.
Even though crude has moved higher in recent weeks, massive builds continue to show in the data, which is bearish for crude oil considering there is so much supply in the system. The next meaningful set of data will be issued April 28, when the advanced look at GDP for the first quarter will be distributed.
Earnings reports
Earnings season is fully underway. Some of the most popular names are set to report including Morgan Stanley, IBM, Netflix, Goldman Sachs, Johnson & Johnson, Intel, American Express, Verizon, Google, Microsoft and Starbucks. Bellwether multinational conglomerates Caterpillar, General Electric and Honeywell will round out the calendar on Friday.
Leading into first-quarter earnings season, the general sentiment has been quite negative because of the slowing global growth theme, depressed oil prices and strength in the U.S. dollar affecting sales.
All of this has led to a slashing of analyst estimates, but as we saw this past week with JPMorgan Chase, the stock surged higher following its report because of a strong top and better-than-expected performance on lower estimates. This could potentially be the trend for the season.
“Revenue growth fell short of initial estimates in three of the past four quarters, even though earnings still beat projections in each of those quarters. If companies can start showing better top-line growth, or even better guidance for sales than what analysts are currently expecting, earnings growth could begin becoming more robust, and we could see the trough in earnings locked in, instead of pushed out by a quarter, as has happened in the past few quarters,” Lindsey Bell, senior analyst at S&P Global Market Intelligence, said in a special trend analysis report.
High on Netflix
Netflix, the home of TV favorites such as "House of Cards" and "Orange is the New Black," reports on Monday after the market closes. The stock is up 60 percent over the year, and according to Marketwatch, of the 38 analysts covering Netflix, 24 of them rate the stock "buy" or "overweight." Cantor Fitzgerald rates Netflix a "buy" and expects a strong earnings report.
Analyst Youssef Squali said in a research note regarding Netflix, “While domestic adds have slightly missed expectations over the last two quarters, impressive growth in international subscribers has more than offset the shortfall. We believe these trends will continue near-term as the October 2015 domestic price hike rolls out to a substantial part of the user base in 2Q16 and 2H16, and as the expansion in 130 countries in 1Q16 takes hold.
"Given the company’s subscriber growth potential worldwide, improving original content, unmatched value proposition and the ongoing shift to on-demand viewing/unbundling, we remain constructive on the name.”
