With market at record highs, eyes on reports from
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[January 18, 2020] By
Caroline Valetkevitch and Noel Randewich
NEW YORK (Reuters) - Reports from Netflix,
Intel and Texas Instruments next week may hint at what is to come in the
December quarterly earnings season, with some investors wary of possible
danger signs that could knock Wall Street after its latest surge to
The S&P 500 has gotten off to a strong start in January, up 3% so far
this year, fueled by a truce in the U.S.-China trade war, low interest
rates and signs the economy remains healthy.
Analysts on average expect reports to show S&P 500 earnings per share
fell 0.8% in the fourth quarter, with technology earnings seen up 0.6%,
according to IBES data from Refinitiv.
Investors are looking beyond fourth-quarter results at what companies
may say about outlooks and plans for investment in light of the recently
signed Phase 1 trade deal between Washington and Beijing.
Earnings estimates for the fourth quarter have already weakened slightly
in the latest week as initial reports from big banks and a smattering of
other companies filtered in.
"Most of the rally we had in 2019 was in anticipation of better earnings
in 2020," said Willie Delwiche, an investment strategist at Baird in
Milwaukee. "Rather than getting caught up in what the Q4 numbers are,
the attention will be on what - if any - revisions you get to Q1 and Q2
Analyst estimates for quarterly earnings tend to decline as any given
quarter approaches, and any hint that estimates for 2020 are bucking
that trend would be positive, Delwiche said.
The S&P information technology index <.SPLRCT>, which includes such
market heavyweights as Apple <AAPL.O>, Intel <INTC.O> and Microsoft <MSFT.O>,
has led Wall Street so far in 2020 with a nearly 6% gain. It is up 50%
over the past year, the strongest performer over that period. The index
is now trading at 22 times expected earnings, its highest multiple since
around early 2005, according to Refinitiv's Datastream.
The S&P 500 is trading at about 18 times expected earnings, similar to
levels it briefly hit two years ago.
"There's going to be heightened attention to guidance to increase
comfort levels with valuations, given the strength we've seen in the
last two months in the majority of tech names," said Michael James,
managing director of equity trading at Wedbush Securities in Los
Because of that, "you're more likely to see slight disappointments
punished more severely than positive guidance is rewarded," he added.
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A street sign for Wall Street is seen outside the New York Stock
Exchange (NYSE) in Manhattan, New York City, U.S. December 28, 2016.
REUTERS/Andrew Kelly/File Photo
Underscoring the importance of results from Intel on Thursday and Apple on Jan.
28, the information technology sector is expected to have accounted for nearly
22% of total S&P 500 operating earnings in the last quarter of 2019, according
to S&P Dow Jones Indices.
"For a lot of the tech names, they seem to be well positioned for 2020," said
Rick Meckler, partner, Cherry Lane Investments, a family investment office in
New Vernon, New Jersey.
Still, in the market overall, "What has happened is the multiples expanded. And
that's really the risk of the market."
Technology earnings growth for 2020 is estimated at 10.4%, which is expected to
contribute 2.0 percentage points to the S&P 500's expected growth rate of 9.7%,
according to Refinitiv's data, which would make tech the largest contributor.
Netflix's <NFLX.O> quarterly report on Tuesday after the bell will show how well
the video streaming giant is withstanding a wave of competition led by
entertainment heavyweight Walt Disney Co <DIS.N>.
Netflix shares stumbled last year on worries over slowing subscriber growth and
ballooning costs of high-budget productions such as The Crown and The Irishman.
Its shares are down nearly 8% since April 2019, when Disney+ was unveiled.
Disney's stock has risen 24% since then.
Netflix shares tend to be volatile after it reports results, which could be the
Netflix options imply a 7.6% swing for the shares in either direction by next
Friday, Jan. 24. Over the last eight quarters, on average, the shares moved 6%
after the company reported results, according to Trade Alert.
Seen as the chip industry bellwether, Texas Instruments' <TXN.N> report and
potential comments from management on Wednesday after the bell will provide
evidence of whether a global downturn in semiconductor is bottoming out.
Expectations that the chip industry will soon pick up have fueled a 30% surge in
the Philadelphia Semiconductor Index <.SOX> since mid-2019.
Analysts on average expect Intel to report a 3% increase in fourth-quarter
revenue and to forecast a 7% increase in current-quarter revenue, according to
(Additional reporting by April Joyner in New York; Editing by Alden Bentley and
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