The second quarter earnings season kicks into high gear this coming week with results expected from technology heavyweights Microsoft (MSFT), Tesla (TSLA) and Amazon (AMZN), among others. The market’s strong rally from its March lows has been driven by Big Tech, but how much higher can we go?
We are certain to get answers to this question (and others) this week, particularly with regards to the “growth versus value” trade, as well as how long the current rotation will last. While the market ended the week higher, it was, more or less, defensive stocks like utilities, real estates and healthcare that led the way. To be sure, a gain is still a gain. The Dow Jones Industrial Average dropped 62.76 points, or 0.23%, to close at 26,671.95. The S&P 500 index added 9.16 points, or 0.28%, to close at 3,224.73, while the Nasdaq Composite gained 29.36 points, or 0.28%, to finish at 10.503.19.
Stocks had risen in the early trading session Friday, but things turned sour once we learned that U.S. consumer sentiment index fell to 73.2 in July from 78.1. Economists were expecting 78.6. But looking at the trading activity, it seems that investors were less disappointed by the weak consumer sentiment data, but that the market was also less optimistic about additional fiscal stimulus, particularly at a time when COVID-19 cases are still rising. A record 70,000 new cases were reported on Friday – the country’s highest total since the pandemic erupted.
On the bright side, for the week, things weren’t as bad as the choppiness might have indicated. The Dow ended 2.3% higher, while the S&P 500 logged a gain of 1.3%. The Nasdaq, on the other hand, lost 1.1%. Friday’s pullback, nonetheless, suggests the market is preparing to punish companies for poor reported results, particularly those that miss on the top lines at a time when expectations are so low. Here are the names to keep an eye on.
Biogen (BIIB) – Reports before the open, Wednesday, Jul. 22
Wall Street expects Biogen to earn $8.22 per share on revenue of $3.44 billion. This compares to the year-ago quarter when earning were $9.15 per share on $3.62 billion in revenue.
What to watch: Shares of the biotech specialist, which is down 6% year to date, has suffered a near-30% decline from the April high of $340 to the June low of around $260. The price action, which includes flattish-to-down movement over the past month, suggests that investors don’t see any near-term catalysts for Biogen. Not unlike, say, current Wall Street darlings Moderna (MRNA) or Novavax (NVAX), which are both trading at 52-week highs. But while Biogen has faced some operational hurdles due to the pandemic, the company recently filed an application with the FDA, seeking approval for its Alzheimer’s disease drug aducanumab. This, among other topics, are certain to be the key focus of analysts questions on Wednesday’s conference call.
Microsoft (MSFT) – Reports after the close, Wednesday, Jul. 22
Wall Street expects Microsoft to earn $1.39 per share on revenue of $36.54 billion. This compares to the year-ago quarter when earning were $1.37 per share on $33.72 billion in revenue.
What to watch: The strength of Microsoft’s Commercial Cloud business has been, and will continue to be, the catalyst for the stock’s strong year-to-date return of 30%. Due to the work-from-home shift, cloud platforms such as Microsoft’s Azure have experienced a significant surge in demand. Citing relatively strong checks for the quarter, RBC analysts boosted Microsoft’s price target from $200 to $240 with an Outperform rating, saying Microsoft can achieve double-digit revenue growth in in fiscal 2021 due to Azure’s momentum. On Wednesday investors will want some evidence that Azure and Microsoft’s Teams (a Zoom (ZM) competitor) can continue to propel the company higher.
Tesla (TSLA) – Reports after the close, Wednesday, Jul. 22
Wall Street expects Tesla to report a per-share loss of 28 cents on revenue of $5.31 billion. This compares to the year-ago quarter when the loss came to $1.12 per share on revenue of $6.35 billion.
What to watch: With year-to-date gains of 260%, shares of Tesla have driven over the bears in merciless fashion. And it’s been no accident. The company’s second quarter delivery totals has Wall Street analysts modeling for a scenario where the stock — currently trading around $1500 — can reach $2,000 in the next twelve months, which would be an additional premium of 33%. Can the stock continue to drive higher Wednesday? That all depends on whether the company can deliver a GAAP profit for Q2 which would mark not only its fourth straight profitable quarter, but also qualify Tesla for inclusion in the S&P 500 Index — a status that would prompt several large institutional funds who weren’t permitted to buy Tesla to now add the stock to their portfolios.
Amazon (AMZN) – Reports after the close, Thursday, Jul. 23
Wall Street expects Amazon to earn $1.63 per share on revenue of $80.6 billion. This compares to the year-ago quarter when earnings came to $5.22 per share on revenue of $63.40 billion.
What to watch: Shares of Amazon lost more than 7% over the past week, ending Friday with its fifth-straight loss. The stock is now in correction territory after what appears to be an ongoing rotation trade into value stocks and away from the stay-at-home winners. That said, the stock is still up more than 60% year to date, driven not only by its e-commerce strength but also the company’s AWS cloud platform. In Q1 CEO Jeff Bezos told investors that he’s less focused on near-term profits and that the company would keep spending to improve the consumer experience. The stock’s recent pullback suggests investors are concerned about near-term margin pressure.
Intel (INTC) – Reports after the close, Thursday, July. 23
Wall Street expects Intel to earn $1.04 per share on revenue of $18.55 billion. This compares to the year-ago quarter when earnings were 92 cents per share on revenue of $16.50 billion.
What to watch: Intel shares have lost some steam and have traded flat over the past three months. But according to BofA analyst Vivek Arya, the company’s Q2 numbers are expected to show increased tailwinds from improving demand in personal computer sales due to the work-from-home environment. Arya estimates not only a 7% PC chip growth in first-half demand for Intel, he sees the trend maintaining in Q3. This is significant for Intel given that PCs still account for about 50% of the company’s revenue and 60% of profits. BofA maintains Buy ratings on Intel with price target of $70, suggesting a 16% rise from current levels.
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