Equity Futures Rally On Earnings Despite Looming Fed Announcement

Equities are in the positive ahead of the Fed announcement. The Federal Reserve wraps up its two-day meeting today with its traditional interest rate decision announcement and press conference. It’s unlikely that the Fed will say much different than what it has previously laid out. The Fed has been focused on reducing and ending its bond-buying program in March. The Fed is also expected to discuss its first rate hike this year in March.

Investors will be trying to read the mind of Fed Chairman Jerome Powell’s by listening closely to his tone. Despite the Fed’s desire to raise rates this year, they’ve been relatively dovish and unwilling to commit to rate hike timing. A more hawkish Fed would probably be one that is willing to consider raising rates in each of its seven remaining meetings this year. Chances are the Fed will remain relatively dovish, but investors would like to see more details to the Fed’s plans.

Earnings season continues to roll on with AT&T (NYSE:T) reporting Wednesday morning before the market open. T beat on revenue and earnings estimates despite a 10% drop in revenue from its satellite TV company DirecTV. The drop was somewhat expected as it relates to many other pandemic plays. The company rallied about 1% before the opening bell. AT&T is merging its WarnerMedia business with Discovery (NASDAQ:DISCA). DISCA was up 1.6% in premarket trading.

Boeing's (NYSE:BA) earnings nose-dived reporting a greater-than-expected loss and less-than-expected revenue. Analysts were aware of a number of write-offs that would lead to a loss, but they didn’t know how big the write offs would be. On the bright side, BA maintained its 2022 earnings outlook. Premarket traders were unsure what to do with the stock immediately after the news, it rallied and fell 2-3% from positive to negative but appears to be favoring the positive by about 2%.

Moving over to health care, Abbott Labs (NYSE:ABT) reported better-than-expected earnings and revenue, but still fell 1.67% in premarket trading. The company saw revenue increases in nutrition, diagnostics, and medical device revenue.

After Tuesday’s closing bell, Microsoft (NASDAQ:MSFT) reported great earnings and revenue but failed to grow its cloud business, causing the stock to drop 4% in after-hours trading. However, sentiment appears to have changed overnight because the stock was up 3.57% in premarket trading after the company increased its 2022 revenue guidance.

Texas Instruments (NASDAQ:TXN) had a big upside earnings surprise, prompting the stock to rally 3% in after-hours trading and continue higher overnight rising to 4.05% before Wednesday’s opening bell. TXN appears to have had a positive influence on chipmakers because other semiconductors are rising in premarket trading.

After Wednesday’s close, another slew of earnings announcement will come from companies like Tesla (NASDAQ:TSLA), Intel (NASDAQ:INTC), Las Vegas Sands (NYSE:LVS) and Whirlpool (NYSE:WHR).

Looking outside of earnings announcements, toy-maker Mattel (NASDAQ:MAT) has won the right to produce Disney princess dolls that will be joining Mattel’s Barbie doll line. The move edges out rival Hasbro (NASDAQ:HAS). MAT rallied 8.5% in premarket trading, DIS rose 1.38% and HAS fell 0.22%.

h2 Tuesday’s Tumble/h2

Despite Monday’s nearly historic price swing that left the major indices closing in the positive, the S&P 500 and the Nasdaq Composite fell 1.22% and 2.28%, respectively. On the other hand, Dow Jones Industrial Average was only slightly lower at 0.19%. The Dow appears to have been buoyed by half of its 30 companies reporting earnings Tuesday. Let’s look at a couple of these companies.

American Express (NYSE:AXP) was the biggest winner of Dow constituents, rallying 8.92% on better-than-expected earnings but falling short on the revenue estimate. AXP also boosted its forecasts after hitting a record in credit card spending. International Business Machines (NYSE:IBM) wasn’t too far behind AXP because it rallied 5.65% on rising earnings from its cloud business that helped the company beat earnings and revenue estimates.

Johnson & Johnson (NYSE:JNJ) also helped boost the Dow by rising 2.86% on better-than-expected earnings and revenue. The company is still preparing to split into a consumer products company and a pharmaceutical company, and JNJ is busily preparing for the split.

On the downside, Verizon (NYSE:VZ) and 3M (NYSE:MMM) both traded a little lower on the day, reporting better-than-expected earnings but falling short on revenues. VZ increased its forward earnings guidance, which also helped the stock rise 0.47% in premarket trading but fell back into the negative and closed 0.11% lower on the day. MMM contributed its success to its customer focus and the ability to manage supply chain issues, which led to the stock rallying 1.75% before the bell but was unable to hold the gains and traded just 0.55% higher for the day.

Lockheed Martin (NYSE:LMT) rose 3.71% after beating on top and bottom line numbers. LMT reaffirmed its 2022 sales outlook, which helped the stock rise 0.50% before the bell. The Federal Trade Commission is planning to file a lawsuit to stop LMT’s acquisition of Aerojet Rocketdyne (NYSE:AJRD). The acquisition was expected to cost LMT $4.4 billion. AJRD fell 18.56% on the news.

Former Dow component, General Electric (NYSE:GE) fell 5.98% after missing on its revenue estimates and providing lower future earnings guidance. The company cited supply-chain difficulties as a major reason for the issues.

Going into Monday, about 76.6% of companies had reported better-than-expected earnings. This is above the long-term average of 65.9%, but below the prior four-quarter average of 83.9%. With the previous year’s earnings so strong, investors are struggling to get excited about what they’re seeing.

h2 Confidence Game/h2

In the last couple of articles , I’ve discussed the Cboe Market Volatility Index (VIX) as a measure of confidence or concern for investors. The VIX has shot up just shy of 40, which has been a level of high concern or fear for investors but dropped back to 30 before the close. It spiked again to 36 on Tuesday and closed around 31. These are all elevated levels that are above normal.

As investor confidence has fallen, so has consumer confidence. According to The Conference Board, consumer confidence as had declined this month due to rising inflation and the Omicron variant. However, the previous three months, the CB recorded higher confidence. Stock prices often reflect gas prices so it should come as no surprise that changes in the investor confidence and consumer confidence are declining together.

Laboring the Point: According to FactSet, labor costs have been one of the most frequently mentioned topics during earnings conference calls. It seems to be an unfortunate injustice that the rising cost of labor, which allows workers to get further ahead, could also be a precursor to recession.

The Fed will be looking to curb the rising labor costs by slowing down the economy. However, with the Great Resignation prompting many people to quit their jobs to start a business among other things, the Fed can do little to incentivize workers to not start new businesses or take a break from working. Rising interest rates could slow the number of new businesses because borrowing costs could make it more expensive to get capital, or higher rates should reduce consumption. However, the Fed wants to address inflation, not send the United States into a recession.

Perhaps the rugged individualism that Americans are known for continues to live in the hearts of its citizens because European Central Bank President Christine Lagarde observed that Europe isn’t seeing the same kind of “quits rate” on that side of the Atlantic. This means the Fed has a very unique problem.

Cloud Seeding: Cloud-based computing is a fancy term for “other people’s computers,” which makes the security and transparency of cloud computing a bit suspect to some businesses. Owning their own servers can be expensive for companies because they must buy, store, and cool the servers. However, owning servers allows them to know what’s going on in their computers. A business can better ensure that their and their customer’s data is safe. This is one reason why banks haven’t embraced the cloud the same as other businesses.

Additionally, cloud space is becoming more and more concentrated among a few large companies. Concentrated servers could become an issue on par with the centralized electrical grids. A major catastrophe in one area could have far reaching negative effects.

Finally, regulators are increasingly concerned about cloud-computing giants. The United Kingdom’s Prudential Regulation Authority is looking into the risks associated with disruption if cloud bank services fail or are hacked. Cloud-computing companies were rising high when growth was everything, but the changing market conditions appear to be bringing closer scrutiny to these companies.

Written By: TD Ameritrade