CAT In Driver’s Seat: Earnings Begin As Fed Looms

 | Jul 30, 2018 11:41AM ET

(Monday Market Open) Apple (NASDAQ:AAPL) and Caterpillar (NYSE:CAT) earnings. A Fed meeting. Inflation data. A payrolls report. Sounds like enough to fill a month’s economic calendar, but it all happens this week.

Amid that cluster of headline events, investors continue to digest Friday’s strong read on Q2 economic growth while they ponder the social media industry landscape after disappointing use data from both Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR).

The Dow Jones Industrial Average and the S&P 500 are both up four-straight weeks, but the Nasdaq has been down two-straight weeks. That raises the question whether this is the beginning of a turnover from the COMP and pure tech leadership back to big-cap leadership. A couple of stocks influenced Nasdaq heavily last week, so we’ll see if the index can get back on track in the days to come.

h3 CAT Earnings: More Than A Meow/h3

The fun got started this morning with Caterpillar (NYSE:CAT), which saw its shares surge over 3% in pre-market trading after reporting adjusted earnings per share of $2.97, well above the $2.73 projection from Wall Street analysts. Revenue of just over $14 billion was slightly above estimates as well, and the company raised guidance. Although stock futures had been trading lower before CAT reported, it’s possible CAT’s healthy results could inject some positive vibes.

Recall at the company’s Q1 earnings call, CAT CFO Brad Halverson said then-earnings of $2.82 a share represented a “high water mark" for the year. Today’s release seems to have surpassed that mark. In a press release accompanying the numbers, CAT called first half results “outstanding,” cited “healthy order rates,” and said, “most end markets continue to improve.”

Beyond the raw numbers, CAT’s call today looms large. The commodity recovery that helped benefit CAT in some of its end markets has also negatively impacted the company by adding to its material costs. On last quarter’s earnings call, management said they expect higher material costs, particularly steel, to be a headwind all year. In addition, 25% tariffs on U.S. steel imports cast a large shadow over companies that rely heavily on the material. Consider listening for any updates on how all this is affecting CAT.

h3 Earnings Sizzle So Far/h3

Aside from FB, TWTR, NFLX and a small handful of other disappointments, it’s been a bountiful earnings season to date by most measures. Through Friday, average earnings growth for S&P 500 companies stood at 21.3%, according to FactSet. Of the companies reporting, 83% have beaten Wall Street analysts’ earnings estimates and 73% have beaten on sales. That’s well above average, and the earnings beat percentage is the highest since FactSet began tracking this back in 2008.

Despite some of the worries that helped send the tech bellwether Nasdaq Composite to a 1% loss last week, at the end of the day what really matters is healthy earnings. That’s what we’ve been seeing. A host of major earnings reports awaits investors with the season about 50% over (see more below).

Last quarter’s 4.1% gross domestic product growth helps put the corporate strength into context. There just seems to be a lot of evidence the economy is really humming right along, with wage growth the only part that seems to be struggling. But everything else is really hard to argue with. The last four quarters averaged about 3% economic growth, a definite improvement from recent years.

h3 Pondering Payrolls /h3

That said, this is another week and investors face a shiny new batch of data. None are more important, arguably, than Friday’s monthly payrolls report. Job gains the last few months hit the economic sweet spot, averaging 211,000 but without enough wage growth to get most investors too worried about overheating inflation. In June, jobs grew 213,000 and wages rose 0.3%. Over the last year through June, wages are up 2.7%.

Wage growth again looms as a potential market mover. Anything with a “3” in front of it on the annual growth chart could potentially raise eyebrows as investors start wrestling with the dreaded “I” word (inflation). Wall Street analysts expect July jobs growth of 190,000 and monthly wage growth of 0.3%, according to Briefing.com, and neither of those figures would in themselves seem like enough to raise too many eyebrows about price pressure if that’s how it shakes out. We’ll preview the report in more detail later this week.

Speaking of inflation, the Fed’s preferred measure of Personal Consumption Expenditure (PCE) prices is due tomorrow. This indicator has looked pretty benign recently, rising 2.3% year-over-year in the most recent report and 2% for the core number that excludes food and energy. Wall Street analysts expect just a 0.1% month-to-month rise for June, down from 0.2% for May, according to Briefing.com.

h3 Fed Meets As Market Sees Rates Remaining Flat/h3

The day after PCE, the Fed gets a chance to weigh in on the economic picture as it concludes its Federal Open Market Committee (FOMC) meeting. Chances of a rate hike appear highly unlikely, but not completely out of the realm of possibility. The futures market places rate hike odds at 2.5%.

The Fed raised rates at its meeting last month, and futures prices indicate a better than 90% chance that the Fed will adjust the dial for a third time this year by the September meeting and a 62% chance of a fourth hike by year-end. This month’s meeting is sans press conference, so it seems unlikely to bring much in the way of fireworks.

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