Walmart, Home Depot Smash Estimates, Giving Sagging Market A Lift

The earnings hits just keep on coming.

This morning, Walmart (NYSE:WMT) and Home Depot (NYSE:HD) became the latest major companies to easily knock analysts’ average estimates out of the park. Retail appears to be alive and well, and so does the consumer, though there are a couple of caveats.

These healthy earnings reports aren’t too shocking when you consider some of the economic data from Q1, especially retail sales. What might be surprising, however, is that shares of both companies actually gained ground ahead of the open. That wasn’t set in stone considering how many times this quarter we’ve seen strong earnings followed by investors selling shares, though that’s been more of a tech phenomenon than any other sector.

Looking at WMT, e-commerce and grocery sales both came in solid even if e-commerce growth wasn’t as amazing as in Q4. It was also nice to see them raise guidance.

It’s especially interesting that U.S. same-store sales rose 6% even though the comparison was against Q1 2020 when people were panic shopping as the pandemic bore down on the economy. Maybe the stimulus checks people received last quarter help explain the improvement, but if that’s the case it could be temporary, something to consider ahead of Q2.

On the bottom line, WMT saw earnings per share of $1.69 versus the $1.21 consensus. Revenue of $138.3 billion outpaced analysts’ average projection of $131.95 billion. WMT’s CEO said optimism is higher than it was at the beginning of the year and customers really want to get out.

HD also crushed analysts’ estimates on the top and bottom lines, but its press release didn’t give any outlook. HD hasn’t put out guidance since COVID started, so investors might want to pay close attention during its call this morning to get a sense of where executives see the business going. For now, maybe it’s good enough to see U.S. same-store sales up an amazing 30% year-over-year and hear them say in the release that they’re seeing “unprecedented demand for home improvement projects.”

That’s pretty much been the case since COVID started and people got stuck at home looking around at projects to do. On the less positive side, HD is starting to lap some of the COVID quarters from last year, which could potentially be a headwind in coming months. The same-store sales growth for HD were particularly impressive considering HD was one of the few big retailers that stayed open throughout Q1 2020 despite pandemic-related shutdowns that began that March.

HD and WMT weren’t the only big retailers reporting. Macy’s (NYSE:M) also had a nice quarter.

There’s other stuff going on today besides retail earnings. Crude is edging higher, now above $66 a barrel. Typically, $65 has been a tough barrier for it to stay above recently. At the same time, despite all the strength in earnings and signs of reopening, the 10-year Treasury yield actually lost a little ground, falling below 1.64% this morning. That appears to be one possible factor that’s maybe giving Tech shares a tailwind in the pre-market after they had a rough start to the week.

Data-wise, things weren’t quite as impressive, as April housing starts fell sharply from March and missed Wall Street’s consensus view. But again, they’ve had incredible growth and it’s just a single print, so keep it in perspective. On the plus side, building permits were near expectations and about equal with March, and permits can be a better view into the future of housing demand.

h2 Sluggish Start To Busy Week/h2

Monday was one of those days on Wall Street where the session ends and you wonder why people showed up. None of the major metrics really changed much over the course of the session, with indices turning slightly lower but not enough to make a measurable difference from where we were Friday afternoon. That’s equally true almost everywhere you looked, whether its stocks, bonds, volatility, or the dollar.

The exception was commodity prices, which continue to roll upward. Crude, gold, and copper, for instance. Lumber has also been forging new highs, something that might be interesting to hear about on today’s Home Depot (HD) earnings call to see the possible impact on do-it-yourselfers.

It’s also interesting to see how the dollar/gold relationship has reversed in recent weeks. Not long ago, the dollar was surging and gold was struggling. Now it’s the opposite. Both are what you’d expect for these two, which tend to move opposite the other.

It’s not surprising to see gold gain here with people worried about inflation, and gold might also be getting a lift from the recent setback in cryptocurrency prices. Gold surged through the key technical level of $1,828 an ounce on Monday. The past couple of times it took out key technical resistance it had trouble gaining traction and fell back, so watch to see if it can consolidate these gains. Some of the gold miners surged yesterday.

The dollar, on the other hand, is edging down near 2021 lows at just above 90. It hasn’t spent a lot of time below 90 this year, so that’s an important level to watch. It fell below 90 early Tuesday. The weak dollar could be helpful for some of the big multinationals like Deere (NYSE:DE), which is scheduled to report Friday. Small-cap stocks, on the other hand, tend to historically perform better with a stronger dollar, so their recent softness could reflect some dollar damage, so to speak.

h2 Leadership Still Lacking/h2

Small-caps have been underperforming along with Tech recently, while major value stocks have generally done better. Monday saw more of that trend. Both Tech and small-caps are often looked to for leadership, so their failure to pick up the baton these last few weeks arguably continues to burden the overall market.

Speaking of leaders, Apple's (NASDAQ:AAPL) late Monday recovery from its lows—which wasn’t enough to make it positive for the day—might have had some technical significance, keeping the stock just above its 200-day moving average. It flirted with that level, now around $123, last week, the first time it’s been at the 200-day since April 2020.

From a broader technical perspective, things haven’t changed much from where they left off Friday. Key technical support for the S&P 500 Index appears to rest near the 50-day moving average of 4070, but a drop below that could open the way to additional selling with the SPX still quite a ways above its 200-day moving average. At the same time, as we’ve noted here recently, “buy the dip” keeps rearing its head on every downturn in the SPX. That could push back against any selling pressure if the index moves lower.

The SPX has fallen three of the last four weeks, while the NASDAQ Composite is down four weeks in a row. There wasn’t much of a break for Tech to start the week, with semiconductors and AAPL getting smacked early in Monday’s session before finding a few buyers later in the day. We’ll see now if that late buying interest has any legs for Tuesday.

Also in Tech, Cisco (NASDAQ:CSCO) is expected to open its books tomorrow. CSCO tends to have a solid grasp on the global economic situation simply because it has exposure in so many different places and with so many kinds of customers. If CSCO is doing well, that could help convince investors that business in general has a tailwind.

It’s interesting that late last week and early Monday saw a bit of resiliency for some of the beaten-down Tech sector. Western Digital (NASDAQ:WDC) and Seagate Technology (NASDAQ:STX) both hit 52-week highs Monday. Both appeared to be getting help from reports of skyrocketing demand for high-capacity drives used to create Chia, a new cryptocurrency, Barron’s reported.

This cryptocurrency claims to be “environmentally friendly,” something coming more into focus after Tesla’s (TSLA) Elon Musk said he’s worried about the use of fossil fuels in bitcoin mining.

h2 Nowhere To Hide Revenue/h2

We’ve talked a lot about companies beating earnings per share estimates this reporting season, but EPS isn’t always the best metric of corporate health. There are many ways companies can adjust things to impress investors on bottom line growth, but there’s no way to cover up a miss on revenue.

That’s why it’s impressive to see 76% of S&P 500 companies beating analysts’ revenue estimates for Q1, with 91% of companies reporting. That’s according to FactSet data, and is on pace to be the fourth best revenue beat since 2008.

Drilling down into revenues for various sectors, the Information Technology (93%) and Communication Services (88%) sectors have the highest percentages of companies reporting revenues above estimates, FactSet said, while the Consumer Discretionary (60%) and Utilities (61%) sectors have the lowest percentages of companies reporting revenues above estimates.

Keep an eye on revenue as retail earnings week continues.

CHART OF THE DAY: FLAT RATES NOT HELPING TECH. Earlier this year, the rally in the 10-year Treasury yield (TNX—candlestick) put a dagger into the Tech sector (IXT—purple line). When yields flattened in early April, Tech revived. However, the revival didn’t last despite continued stability in yields. Does this mean Tech investors remain worried about tighter borrowing costs down the road? Data Sources: Cboe, S&P Dow Jones Indices. Chart source: The thinkorswim® platform . For illustrative purposes only. Past performance does not guarantee future results.

Retail Earnings Week Far from Over: If a company has a cash register, it’s probably reporting this week, or at least it seems that way. Today’s WMT, M, and HD reports just started the parade, with Target (NYSE:TGT) and Lowe’s (NYSE:LOW) on the way tomorrow morning. It doesn’t slow down Thursday, with Kohls (NYSE:KSS) and Ralph Lauren (NYSE:RL) penciled in that day. Foot Locker (NYSE:FL) is expected to follow on Friday.

As all these companies report, consider watching and listening for e-commerce revenue. Obviously that took on a huge role during COVID, but can companies get shoppers back to stores now that the pandemic seems to be letting up a bit? Once people get in the habit of shopping a certain way, they may keep doing it, COVID or no COVID.

Inflation is another thing to monitor. Food and energy costs can be a major burden for retailers, so are they seeing the impact on their margins? We should learn a lot this week.

What Happened to the Policy Hawks? Whether their voices have been drowned out by the doves or gone the way of the dodo bird, we don’t hear much these days from any Fed policy hawks. This despite last week’s hotter-than-expected price index readings at both the producer and consumer levels. Plus, looking beyond our shores to China, the prices charged for manufactured goods jumped 6.8% year over year in April. And people are beginning to notice their purchasing power eroding in every visit to the grocery store. Not surprisingly, April retail sales last month came in flat—a sharp contrast from the previous period’s growth of over 10%. Yet, the Federal Reserve dismisses the warning signs as “transitory,” to use Fed’s words, and expected.

Of course, this shouldn’t come as much of a surprise. The Fed had laid out the plan to achieve an “average” of 2%—meaning necessary target overshoots would be OK. So, after the markets tumbled for two straight days after the CPI report, the market once again advanced strongly last Thursday and Friday. The question is whether “transitory” inflation might lay the groundwork for longer-term inflation in the future. At that point we might see the hawks circling the skies again as the Fed tries to transition from its current “not even thinking about thinking about rate hikes” stance.

Lean Times: Investors of a certain age (and those of us who had to read those case studies in business classes) might be familiar with the concept of lean manufacturing—or its predecessor made popular at Toyota (NYSE:TM)—“just-in-time” (JIT) manufacturing. The idea behind JIT was to streamline processes, manage supply chains, and control inventory costs. Over time, the JIT philosophy was adopted into non-manufacturing businesses and even into the office environment. For the last few decades, the resulting efficiencies have been an instrumental part of corporate productivity and a source of shareholder value.

Why the history lesson? Over the past year, one has to wonder about the future of corporate “leanness.” Last spring it was a shortage of toilet paper and other basic necessities. Then it was semiconductors and rare earth elements. Lately we’ve heard reports of shortages in lumber, steel, copper, and other basic building supplies. And last week, businesses in (and residents of) the Eastern Seaboard saw firsthand what happens when fuel supplies are suddenly disrupted. Running lean operations is only productive if you don’t have to scramble (and perhaps pay through the nose) for the basics. Might we see a reversal of the JIT trend in the coming days as companies work to shore up inventories and solidify supply chains? Either way, a productivity hit would likely show up in corporate margins—something to look out for in the coming quarters.

Written By: TD Ameritrade