No spanner in the Star-Spangled Banner - yet

Banks and tech stocks need a strong US earnings season if they’re to replicate last year’s big gains. 

The imminent fourth-quarter earnings season in the US is like no other.

Whereas usual quarterly updates provide only that, the end-of-year announcements combine the quarterly numbers, the annual numbers and an outlook statement which is likely to take a view of the forthcoming year, as opposed to the next three months.

These will be particularly interesting given the strong performances of the main US indices, an easy year-on-year comparison with what was a poor final quarter in 2018, and the previously positive effects of President Trump’s tax reforms now having largely washed through, also easing general comparatives.

The premier indices were buoyed by an accommodative Federal Reserve, uncertainty in the bond markets, meaning that for the most part equities were the investment destination of choice, and this was despite the overhang of the (at times) difficult trade conversations between the US and China. 

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The Dow Jones Industrial Average gained 22.3% in 2019, the S&P 500 added 28.9% and the technology-laden Nasdaq index a whopping 35.2%.
With the latter in mind, it is of little surprise that there were some stellar tech stock performances during the year.

The top three risers in the S&P 500, all from either in or around the semiconductor space, were Advanced Micro Devices (NASDAQ:AMD) (up 148%), Lam Research (NASDAQ:LRCX) (115%) and KLA-Tencor (NASDAQ:KLAC) (99%).

Not that the better-known tech heavyweights were slouches, however.

In the calendar year, Apple (NASDAQ:AAPL) added 86%, Facebook (NASDAQ:FB) 57%, Microsoft (NASDAQ:MSFT) 55%, Google (NASDAQ:GOOGL) 29%, Amazon (NASDAQ:AMZN) 23% and Netflix (NASDAQ:NFLX) 21%.

There was also evidence that some of the tech companies in hardware and semiconductors, for example, were investing heavily in their businesses. If so, a relative absence of capital expenditure in 2020 would immediately boost earnings, so outlook comments from the tech companies may well give a clue over the next few weeks.

Previously seen as moving towards becoming “utilities” because of limited earnings growth, the banks had a surprisingly strong year. 

The “big five” enjoyed big gains, topped by Citigroup (NYSE:C), whose shares rose 54% in 2019. Bank of America (NYSE:BAC) added 43%, JPMorgan Chase (NYSE:JPM) 43%, Goldman Sachs (NYSE:GS) 38% and Morgan Stanley (NYSE:MS) 29%.

Several factors helped propel the sector, not least of which was the fact that the banks were heavily discounted at the end of 2018 and therefore came into 2019 at attractive levels. In addition, the four Federal Reserve interest rate rises of 2018 washed through and boosted earnings, the earnings per share metrics were bolstered by a major share buyback programme (some $57 billion in total for the big five) and it is believed that there will have been a strong fourth quarter in 2019, helped along by some healthy investment bank contributions.

Equally, the share price hikes have some analysts questioning bank sector valuations and, in the absence of stronger than expected results and guidance on the outlook, shares may be up with events for now.

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There is also the extremely important US consumer, who contributes an estimated 70% of US GDP. In particular, consumer discretionary stocks will be scrutinised for any revealing outlook comments as well as the results themselves, since they are often seen as being the canary in the coalmine in establishing whether the US economy is showing signs of slowing down.

As ever, the retailers’ results themselves will provide winners and losers over the fiercely competitive Black Friday, Cyber Monday and festive trading periods. One stock which had a particularly good year, Target, will be hoping to add to its 2019 share price gain of 94% as it moved to multi-channel selling, resulting in some of its best customer traffic growth in a long time.

This earnings season will be vital on a number of fronts as we consider the landscape for the coming year.

The results will set the tone and could continue the positive momentum of 2019 if the earnings – and, equally importantly, the outlook – are upbeat. 

At the same time, if it can be shown that the US economy remains in late cycle, rather than end-cycle, the naysayers will be kept at bay, at least for the time being.