Market Weighs Decent Earnings Against Discouraging COVID-19 News

While a decent showing by big banks seems to be helping investor sentiment somewhat, a cloudy outlook for the coronavirus fight appears to be keeping potential gains in check.

Goldman Sachs (NYSE:GS) hit the cover off the ball with earnings that handily topped analyst expectations and revenue that also came in ahead of forecasts. The results fit right in with the theme we’re seeing that banks that derive more revenue from trading desks are tending to do relatively well.

Meanwhile, Bank of America (NYSE:BAC) reported earnings that beat estimates but it missed on revenue. Lower interest rates were a headwind for the bank’s net interest income, which dropped by 17% year on year. Similarly, low rates weighed on net interest income for Wells Fargo (NYSE:WFC), which missed on earnings even though revenue was higher than expectations.

In coronavirus-related news, Reuters reported that the Food and Drug Administration in a November inspection found quality control issues at an Eli Lilly (NYSE:LLY) plant that more recently has been ramping up to make a coronavirus antibody therapy. The company said data deletions on the plants manufacturing processes that the FDA cited were not related to production of the therapy. The report said LLY’s pausing of its clinical trial for the drug over a potential safety concern was separate from the FDA findings.

And here’s a word you might not have heard in a while: Brexit. Investors apparently are monitoring talks between the UK and the European Union about a deal on their future relationship. Discussions on a trade deal seem to be stalled, throwing an Oct. 15 deadline for a trade agreement into question.

h2 Despite Banks, Stocks Slip On Stimulus, COVID Worries/h2

Stocks slid on Tuesday, with all three major U.S. indices halting multi-day winning streaks as concerns about combating the coronavirus and worries about an elusive government stimulus package outweighed better-than-expected earnings from two big banks.

Although it was encouraging to see JP Morgan Chase (NYSE:JPM) and Citigroup (NYSE:C) report earnings and revenue that exceeded analyst estimates, it seems investors put more weight into the stimulus concerns and news that LLY’s antibody treatment for the coronavirus was paused. The LLY news came afterJohnson & Johnson (NYSE:JNJ) paused its COVID-19 vaccine trial due to an “unexplained illness.”

Without a vaccine or robust treatment for the coronavirus, investors have been worried that the economic recovery won’t be able to fully take flight. While the stock market has been helped by measures from the Federal Reserve and a boost from companies that are benefiting from the so-called stay-at-home trade, the recovery on Main Street has been slower, with unemployment remaining high and many businesses not enjoying the foot traffic they once did prior to the pandemic.

To help alleviate the economic pain, both stock market participants and everyday folk have been hoping the federal government will come through with another round of stimulus to help give the ailing economy another shot in the arm.

But hopes for the passage of such a measure dimmed as U.S. House Speaker Nancy Pelosi said a $1.8-trillion package from the Trump administration falls short of what is needed. Meanwhile, Senate Majority Leader Mitch McConnell said the Senate will vote on a limited coronavirus aid package this month, but the fate of that proposal is far from certain.

h2 Stay-At-Home Trade Alive And Well/h2

Amid the uncertainty surrounding economic aid for everyday Americans and the stumbles on the coronavirus treatment front, the so-called stay-at-home stocks did relatively well.

Peloton Interactive (NASDAQ:PTON) hit a new 52-week high and closed nearly 2.9% higher. Zoom Video Communications (NASDAQ:ZM) rose more than 5.5%, while Roku (NASDAQ:ROKU) gained more than 7% and Netflix (NASDAQ:NFLX) jumped nearly 2.7%.

Investors also seemed pleased about news that NFLX has ended free trials in the U.S. market. But the company seems to be also benefiting from Walt Disney’s (NYSE:DIS) push into streaming. Does that seem counterintuitive? See below for a more detailed look at the state of streaming.

h2 Could Be Rough Quarter For Travel/h2

While the stay-at-home trade seems alive and well as more people work, play and learn from home, it seems clear that more traditional parts of the economy aren’t out of the woods yet. Case in point: travel, which has been among the hardest hit industries amid COVID-19.

Delta Air Lines (NYSE:DAL) shares dropped nearly 2.7% after the airline reported a larger-than-expected loss on revenue that was less than forecast. Encouragingly, the airline is seeing a recovery in customers travelling, but it’s revenue was still down more than 75% from a year ago. Investors are scheduled to get another look into the health of the airline industry later today when United Airlines (UAL) opens its books after the closing bell.

Ahead of earnings, research firm FactSet pegged airline earnings expectations to plunge an eye-popping 313% year-over-year in Q3. DAL’s release was certainly a step in that direction. But travel isn’t just about airlines. Analysts are eyeing a fall in earnings of 132% versus a year ago for the Hotels, Restaurants, and Leisure sub-sector. In addition to airlines, stay tuned for potential signs of life from hotels and cruise lines as well.

Travel-related companies—like many of the areas hard-hit by the virus—are trying to look beyond the current quarter to what will hopefully be a quick turnaround in 2021 and 2022. Past earnings are a data point to help investors make informed decisions, but stocks are priced on expectations of future earnings.

What’s In Store For Silver Screen? At first blush, it might seem that Disney’s reorganization to give more priority to its streaming business would be a bad thing for Netflix, which is a direct competitor to the Disney+ streaming service. Both are vying for eyeballs with original content, and not all subscribers are paying for both entertainment services at the same time. But while it may seem that investors’ initial reaction should have been to think that this helps Disney and hurts Netflix, it doesn’t seem like that’s how it’s panning out. Instead of this being a Disney-versus-Netflix issue, it’s arguable that this is actually a broader dynamic of streaming versus movie theaters.

Theaters’ Allure as Reopening Trade Seems to Dim: Disney’s theme park, resort, and traditional movie businesses, as well as its exposure to live sports on television, have been hit hard during the pandemic. So it shouldn’t come as too much of a surprise that the entertainment giant is trying to expand its footprint in the stay-at-home business. The company seems to be doubling down on what has already been a successful play during the pandemic as people want to watch more streaming television at home. Disney seems to be fully embracing Netflix’s direct to consumer model, which doesn’t bode well for movie theaters. Yesterday, NFLX shares gained more than 2.6%, roughly in line with the almost 3.2% rise in DIS shares. Streaming platform company Roku jumped more than 7.6%. Meanwhile, AMC Entertainment Holdings (NYSE:AMC) fell more than 13% and Cinemark Holdings (NYSE:CNK) dropped nearly 7.7%.

Beige Can Be an Interesting Color Too: Later today, the Federal Reserve releases its Beige Book. These reports – which are collections of anecdotal information on current economic conditions in Fed districts – come out eight times a year and can offer valuable insight into what’s going economically around the country. Last time around, the central bank noted generally modest increases in economic activity in most districts. But activity was still well below pre-pandemic levels. “Continued uncertainty and volatility related to the pandemic, and its negative effect on consumer and business activity, was a theme echoed across the country,” the Fed said. It could be interesting to see whether Beige Book sources –- which include business contacts, economists, and market experts – are more optimistic or pessimistic about the economy this time around, or whether their views are generally the same, especially since another economic stimulus package hasn’t been approved.

Disclaimer: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

Written By: TD Ameritrade