Investors start to see second quarter reports on revenue and earnings from Internet search, streaming, and social media companies next week when on Monday, July 18, both Yahoo (YHOO) and Netflix (NFLX) report. Amazon (AMZN) follows on July 21. And then in the following week the sector hits full speed with Twitter (TWTR) on July 26, Facebook (FB) on July 27, and Alphabet (GOOG) on July 28.
Before we get bogged down in company specific numbers, though, let’s stop for a moment to look at the big trends in this space.
Trend #1: Global spending on mobile ads is set to surpass spending on banner ads next year. This year, 2016, market research by Zenith, the research unit of the giant ad company Publicis Groupe, spending on desktop digital display ads will fall by 3.1%. In 2017 spending on desktop banner ads will be flat with 2016. By 207, when Zenith projects that advertisers will spend $32.6 billion on social media ads, spending in that digital ad category will exceed spending on desktop banner ads.
Trend #2: Global spending on online video ads in’t far behind in its growth curve. According to Zenith, global spending on ads on online video will catch up to spending on desktop display ads by 2018.
Read the quarterly reports from Alphabet (aka Google) and Facebook through the lens of these two trends. Google now dominates display ads. Facebook is the Big Kahuna in social media. Google, though, has an online video card up its sleeve in its ownership of YouTube–although just about everybody in this space, especially Facebook, is determined to find a way to chip away at YouTube’s dominance. (And let’s not forget the leaders in China’s market Alibaba (BABA) and Tencent Holdings (TCEHY) since China is on a trend to be a bigger online ad and video market than the United States within this timeframe.)
Second quarter earnings results announced this morning by JPMorgan Chase (JPM) held solidly good news for the U.S. economy. Not as much good news for the bank and the banking sector in general, though. JPMorgan Chase is the first of the big banks to report with Citigroup (C) and Wells Fargo (WFC) on deck tomorrow.
Loans of all kinds extended by JPMorgan Chase rose $106 billion from the second quarter of 2015. That’s a 16% increase. “We had broad-based demand for loans pretty much across categories, whether it was auto, business banking, cards, so I would say that speaks well for the U.S. economy and the consumer in particular,” Chief Financial Officer Marianne Lake said.
Figuring out how the bank itself did in the quarter is harder. As reported earnings were $1.55 a share, up from $1.54 a share in the second quarter of 2015, and ahead of the $1.43 a share estimated by analysts. (Net income was down year to year from $6.29 billion in 2015 to $6.2 billion on a lower share count because of share buybacks.)
But that as reported earnings figure included all kinds of one-time charges and credits including an accounting gain and a legal benefit plus a gain from the sale of the bank’s stake in Visa Europe and a loss on the bank’s investment in Square. Adjusting for all those one-time gains and losses earnings came to $1.50 a share, down from $1.54 in the second quarter of 2015 but still above Wall Street estimates of $1.43 a share.
Revenue growth wasn’t as robust as you might expect from growth in the bank’s loan portfolio or those earnings per share figures. Revenue climbed just 2.8% year over year to $25.2 billion powered by a big 35% jump in revenue from fixed income trading. Revenue from equity trading rose just 1.5%.
Earnings grow was so much stronger than revenue growth because JPMorgan Chase continued to cut costs. Non-interest expenses fell 6%. Compensation costs at the corporate and investment bank fell 6% in the first six months of 2016.
I’d look to see if consumer units at Citigroup and at Wells Fargo tomorrow report that same strong picture. (Pay special attention to Wells Fargo’s big mortgage unit.) If consumer lending is as strong tomorrow at those banks as at JPMorgan Chase today that’s good news for the economy as a whole. Make sure to pay special attention to provisions for credit losses. That item rose to $1.4 billion at JPMorgan Chase, an increase of $467 million, from the second quarter of 2015. The bank said that was a result of the increase in the loan portfolio and not a sign of a deterioration in credit quality. See if other banks echo that comment.
Not terribly surprising that U.S. stocks are meandering in slightly negative territory today after busting out to new all-time highs. (The Standard & Poor’s 500 stock index was off 0.09% at the close in New York.) We’re about to head into the meat of earnings season and a little profit taking undoubtedly makes sense to many of those who caught the recent run.
Tomorrow JPMorgan Chase (JPM) kicks off a run of earnings reports from big banks. Citigroup (C), Wells Fargo (WFC), and US Bancorp (USB) follow on Friday morning. I think that all markets would like from these big banks is a lack of negative surprises. No big drops in revenue; no big increases in bad loans; no downturn in mortgage lending. On the upside investors would like to hear something about dividend increases now that these banks have passed the latest tests from the Federal Reserve.
You won’t have to wait long after bank reports, though, for the earnings that could potentially move the market. On Monday, July 18, IBM (IBM) begins the technology earnings parade with Microsoft (MSFT) following on July 19, Intel (INTC) on July 20, and Amazon (AMZN) on July 21. (You’ll have to hold your breath for another week before Apple (AAPL), Twitter (TWTR) Facebook (FB) and Alphabet (GOOG) report on July 26, July 26, July 27, and July 28, respectively.)
Technology earnings are likely to be a big deal this quarter because Wall Street is expecting the sector to turn in a really dismal quarter with earnings projected to fall 7.2% for the Standard & Poor’s technology sector. Although the bulk of that decline will come from Apple, Wall Street has also been busy cutting estimates for IBM (down to $2.81 for the quarter from projections for $3.44 a month ago) and Microsoft (down to $0.58 from $0.67.)
The damage is likely to be limited because of those cuts in earnings projections–unless earnings are even worse than expected (relatively unlikely since companies and Wall Street typically low-ball projections) or (and this is much more likely) companies deliver gloomy guidance for third quarter and full 2016 earnings. IBM, with its huge overseas presence, will be an important early bellwether on how bad guidance will be on expectations for a strong dollar.
Update July 12. The yield on 10-year Treasuries rose to 1.52%, the highest level this month (and prices fell). Last week the yield on the 10-year Treasury hit a record low of 1.318%.
The climb in Treasury yields is likely to be temporary, in my opinion. The market is coping with a series of big auctions this week. An auction of three-year Treasuries on Monday attracted the weakest demand in seven year. Today an auction of $20 billion in U.S. Treasuries was the weakest demand since 2009.
The trend toward higher yields and lower bond prices isn’t limited to the United States. The yield on German 10-year bunds rose by 8 basis points to a negative 0.9%. Yields on the French 10-year bond climbed 7 basis points to 0.19%.
And the bond market faces intense competition for cash from a continued rally in U.S. stocks that had taken the Standard & Poor’s 500 stock index to 2154.70, a new all-time record, as of 3 p.m. New York time. The Dow Jones Industrial Average also hit a new all-time high today. When the S&P 500 is climbing 0.82% in a day, the argument for buying 10-year Treasuries yielding 1.52% gets a little weaker.
But the dynamics driving Treasury yields lower (and prices higher) in the longer term remain in place. At 1.52% for a Treasury and a negative 0.9% for a German bund, U.S.bonds have an immense relative yield advantage that’s likely to keep cash flowing into the U.S. bonds. And yields in Europe seem set to go lower. Deutsche Bahn today become the first non-financial company to sell a bond in euros with a negative yield. More than $3.3 trillion in European sovereign debt trades now with a yield below 0%.
Inflation expectations continue to fall. By the Federal Reserve’s preferred measure, inflation is now rising at just 0.9% annually. The bond market is now trading with expectations for just a 1.3% inflation rate in 2021-2026, according to Bloomberg. That’s the lowest level of implied 5-year inflation in Bloomberg data that stretches back to 1999.
Update July 12. Cummins (CMI) announced today that it would increase its dividend to a quarterly $1.025 from the previous $0.957 payable on September 1 to shareholders of record as of August 22. That brings the foreword dividend yield to 3.45% from today’s closing price of $118.98. Last time I updated this Jubak Picks Dividend portfolio member back on November 11, 2015, the stock paid a dividend yield of 3.95%. The stock has been a member of that portfolio since October 12, 2015. The price appreciation since then is 6.32%.
Shares of Cummins have been stuck in a range between lows of $106.75 (June 27) to $108 (May 19) and highs of $117 (April 19) and $119 (today.)
In today’s ultra-low interest rate environment a yield of 3.45% a reasonably attractive. Of course, the yield would get more attractive if the stock were to pull back with the market during the current earnings season. (I think Cummins is certainly vulnerable to a strong dollar and slower growth in Europe. Watch for potentially disappointing guidance.) Cummins shares moved above their 50-day moving average today. The company next reports earnings on August 2.