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Big tech may be able to stabilize Q1 earnings this week, but investors will be taking their cues from COVID updates

This week officially marks the beginning of peak earnings season with over 300 companies set to report. The season got off to a disappointing start last week with all the big banks showing a year-over-year (YoY) deceleration in growth on the top and bottom line, and as a result markets traded lower on Tuesday and Wednesday.

You might be thinking “but hey, the markets are forward-looking, and we knew to expect bad news from the banks, why wasn’t this priced in?” … and that’s true a lot of the bad news was priced in, a lot of the surprise came when banks announced how much they were putting aside for loan loss provisions for anticipated defaults, and more generally for staying mum on expectations for the second half of the year, only a few gave any form of expectations for Q2. Lack of guidance tends to be more of an ominous sign than poor guidance.  Banks actuals, plus downgrades to earnings estimates in other sectors, brought the blended earnings growth rate from FactSet down to -15% from the expectation of -10% last week.

Despite the banks dragging down markets in the first half of the week, things were looking up Thursday and Friday as plans to reopen America emerged, and Gilead Sciences announced its antiviral medicine remdesivir was showing promise in combating COVID-19. It’s likely those are the headlines that will push investors this earnings season, instead of the earnings themselves, which might be a good thing for this rally.

It’s an incredibly busy week, so here’s the 6 (yes six) things we’re watching: 

1. Big Tech reports earnings

All five FAANG stocks report in the next two weeks, and two in particular, Amazon and Netflix hit record high stock prices last week. In fact, all of these names appeared on our TipRanks trending stocks list as of this morning, which tracks the names with the most number of analyst ratings over a 3 day period. 

Netflix is anticipated to post YoY earnings growth of 114% and revenue growth of 27%. Of course this has been one of the favorite stay at home names since “pause” orders have been mandated in much of the US. 

Leading into its report Tuesday after the bell, most of the sell side analysts covered by TipRanks have reiterated past ratings (mostly buy),  with Morgan Stanley’s 5 star analyst Benjamin Swinburne upgrading to a buy last week. Keep in mind we are still seeing these reiterations of Buy calls despite NFLX being at an all time high. The 12-mo price target amongst our best analysts is for $414.26. And we’ve got a smart score* of 10, with the only negative factor being insider selling in the last 3 mos. 

(*The TipRanks Smart score is calculated using 8 factors we’ve found to be most highly indicative of future stock performance, ie: analyst recommendations, activity from insiders and hedge funds, sentiment from news, individual investors and financial bloggers, as well as technicals and fundamentals)

The other big name that rose to record levels on Thursday and is getting plenty of their own momentum due to coronavirus lockdowns is Amazon. Still, they are expected to post a YoY earnings decline of -10% and revenues of 22%. 

And you can see below, not only do they have a smart score of 10, but every single analyst that we capture that covers AMZN, 32 in total, has a buy rating. I haven’t looked too deeply into this, but I have to imagine there aren’t a ton of names in our universe that have that pedigree… especially as they report record high share prices. Right now we’re seeing a price target of $2460, that’s almost 4% higher than current prices. And you’ll see in the second screen, the 5 most recent ratings are even coming in higher than that target (ratings from Cowen, Wolfe, JPM, Robert Baird and Barclays).

Amazon saw all time intraday high of $2461 on Thursday, and Netflix saw an intraday high of $449.52 on the same day. Both names started to slip as plans to reopen America were announced, boosted by rising optimism that potential medical treatments could accelerate the restarting of the economy, hence getting people out of their homes.

Apple and Alphabet the other two FAANGs on tap this week that are getting some attention after announcing a rare collaboration last week around “contact tracing” — an initiative to integrate technology into their smartphones that will alert users if they have come in contact with someone with COVID-19. Apple currently has a Smart Score of 10, while Alphabet has a Smart Score of 6. 

2. Updates from GILD  – and other health care names working on therapies and vaccines. 

The real marker that the economy is ready to open will be the emergence of a COVID-19 treatment. A vaccine will no doubt get investor attention as well, but with that not expected to happen for 12-18 months we need a treatment to bridge the gap. Otherwise there will be constant fear around a second wave looming that will impact consumer behavior. 

Specifically we’ll be looking to hear more from Gilead Sciences, who reported last week that very early and small trials in Chicago were looking positive. Their antiviral drug, remdesivir, was originally developed for Ebola, but failed to combat that disease, and instead has shown potential in fighting coronaviruses. There is still a long way to go, and the data is still too early, but it gave everyone a little bit of hope they were looking for. 

Gilead currently has a Smart Score of 10, with the best analysts on the platform rating it a moderate buy. 

3. Reopening America

President Trump announced a plan on Thursday to reopen the American economy in three phases, mostly aimed at easing restrictions in areas that have reported lower rates of infection, while harder hit locations will likely be on pause longer. A handful of states, including Texas, Vermont, Minnesota and Montana have started to announce dates for their easing of restrictions that begin as early as the end of this month. Many harder hit eastern and midwestern states have extended their stay at home orders until May 15. We’ll be looking out for more updates from the Trump administration this week, as well as from the states as governors have made clear they will move at a pace that makes sense for their specific situation. 

4. Updated COVID numbers

We’ll also be looking for continued evidence that COVID hotspots such as NYC report improved numbers, and that the plateau of cases there starts to morph into a downturn. Other hotspots such as Massachusetts, Florida and Connecticut will all be in focus as they are expected to peak this week. It looks as though all of the precautions taken around social distancing and the use of personal protective equipment are helping, now we’ll wait to hear about other important initiatives such as expanding antibody testing.

5. Stimulus Progress

Next we’ll want to hear more about how stimulus is working in America. What we know so far: 

  • Stimulus checks – 80M have gotten their stimulus checks, some fintech companies (Current, Netspend) that have been distributing those payments report most of that cash has been spent on food, gas and other essentials. But we know glitches with distribution abound, including issues for tax preparers using services such as H&R Block and TurboTax, and those filing with dependents.
  • PPP – The fight over small business funding will continue this week. The $349B allocated to the paycheck protection program ran out on Thursday, with about 1.3 million loans approved. There is a push to have that replenished with $250B – $400B (no official word as of Sunday evening) before moving on with other stimulus efforts.
  • Mortgages – Nearly 3M homeowners have taken advantage of the mortgage forbearance program for government-backed loans, we’ll be tracking how that number increases this week. 
  • Unemployment – Over 22M Americans have applied for unemployment in the last 4 weeks, jobless benefits will now include up to $600 more per week, on top of what each individual state provides. We’ll want to see signs that people are able to successfully apply for and receive these benefits, as of last week only ⅔ of states were making those additional payments. 

6. Economic Data

On top of all that we have a slew of relevant economic data reporting this week: 

  • Home sales – This week we get monthly reports on Existing Home Sales and New Home sales for March. We know this is not going to be good news. We already got dismal Housing Starts numbers last week, which sharply missed consensus after recently spiking to a 12 year high. MoM results for Existing Home Sales are expected to be down 8%, while New Home Sales are expected to be down nearly 13%. With the spring season off to a bad start, we’ll likely see these numbers suppressed for some time as consumers will no doubt be unwilling to make large ticket purchases. Historically low mortgage rates have encouraged an increase in refinancing, but new mortgage applications have fallen 35% from last year. 
  • Consumer – Retail sales for March came in last week, and were down 8.7% from February, no surprise there. This week we get another important metric on the consumer in the form of the University of Michigan Consumer Sentiment index, which measures how US consumers are feeling about the economy and their willingness to spend money. The indicator is expected to show consumer sentiment plunged 24% in April from the prior month. 
  • Jobless claims – This has become a must watch item each Thursday as over 22M people have applied for unemployment here in the US over the last 4 weeks. No doubt this number will continue to be high this week, but we are looking for it to be lower than last week. Last week’s number of 5.25M was high, but showed a decrease from the prior 2 weeks and we want to see that pattern continue. 

Next week we have over 600 companies reporting as peak season continues and that includes a bunch of the biotech names which will be in view this season as investors (and really everyone) looks for updates from those working on COVID vaccine and therapies.

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