Market Insights

Earnings season started on a strong foot as major banks reported surprising growth in their core businesses.

JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Morgan Stanley (MS), U.S. Bancorp (USB) and PNC Financial (PNC) all beat estimates in the last week. Their stories were similar across the board, with strong loan demand and deposit gains.

“We had strong deposit and client investment asset growth,” JPM CEO Jamie Dimon said. “Our consumer lending businesses benefited from our continued investments and a favorable environment for borrowers, which helped drive healthy volumes.”

That contrasted with intense negativity toward the sector because of the inverted yield curve. Banks were supposed to struggle against the drop in interest rates, which is why investors pushed their valuations to barely half the broader market’s. One thing few seemed to anticipate was actual growth.

There were other signs of business expanding. First, other banks like Wells Fargo (WFC) and Goldman Sachs (GS) beat on revenue, despite one-off items hurting profit. Legal costs continue to drag on WFC, while GS took losses on WeWork and Uber (UBER).

Second, data from the Federal Reserve showed consumer credit growing more than expected in both July and August.

Netflix Goes Global

Netflix (NFLX) is another big gainer, up more than 3 percent after earnings pushed ahead of estimates. The one-time high flier has struggled for more than a year after saturating its core U.S. market. Last night, however the streaming-video pioneer beat subscription estimates thanks to growth in countries like Brazil and India. The third season of Stranger Things helped drive business, drawing a record 64 million households.

All told, more than 6 million new viewers signed up last quarter. Barely 500,000 of them were in the U.S. Management also said the company will start reporting its operations by regions like Latin America and Asia Pacific next quarter. It’s one more step along the evolution from one-time mail-order DVDs to a global media powerhouse.

International Business Machines (IBM), on the other hand, is struggling to adapt. The 108-year old technology company barely squeaked past estimates on profit and missed on revenue. Legacy operations in software, financing and hardware remain under pressure, while newer business like Red Hat aren’t growing fast enough to compensate.

5G Breakout Continues

Another global name made new highs on its strong numbers: TSMC (TSM) — formerly known as Taiwan Semiconductor — the world’s largest contract chip maker.

“5G smartphone growth momentum is stronger than we expected,” the company’s chief executive said after the results today. The CFO also cited “new product launches both in premium smartphones and high performance computing applications.”

That caused TSM to beat estimates across the board and raise capital-spending plans by about 40 percent. Will technology investors view that as a positive sign for other chip stocks like Intel (INTC) that report next week?

Industrial Stocks Leading the Market

Industrials are also rallying. Supplier Fastenal (FAST) led the charge after its earnings and revenue beat estimates. Interestingly, investors seemed to ignore management’s warning that a “general slowing in economic activity that we experienced in the second quarter of 2019 continued in the third quarter.”

Honeywell’s (HON) numbers were more mixed, with sales missing despite strong profit. Executives cited weakness in the global economy amid President Trump’s trade war with China. Railroad operator CSX (CSX) had similar numbers. They advanced nonetheless.

Smaller industrials like United Rentals (URI) and J.B. Hunt (JBHT) also had double-digit gains in the last week. Both reported strong demand.

Health Care Turnaround?

Two of the largest health care stocks are having their biggest weekly gains in years. UnitedHealth (UNH) beat earnings estimates and raised full year guidance. Johnson & Johnson (JNJ) benefited from strength in its core drug business.

Both faced extreme negativity before their reports. UNH is dealing with political risk as Democrat presidential candidates call for nationalized health care. JNJ was facing legal risks from opioid liabilities.

Speaking of opioids, The Wall Street Journal reported states are discussing an $18 billion settlement with major drug distributors. McKesson (MCK), AmeriSourceBergen (ABC) and Cardinal Health (CAH) are all up more than 10 percent on the news.

In conclusion, investors entered this earnings season with a lot of negativity. They worried about profit declines and a weak economy. But so far most of the numbers have been positive.