Cheesecake Factory, Fed minutes — What you need to know on Wednesday

Markets Reporter
Yahoo Finance

Markets will look to bounce back on Wednesday after a disappointing start to a holiday-shortened week.

Walmart (WMT) shares got smoked on Tuesday, falling 10% and weighing on the Dow as the blue-chip index fell over 1%, losing 254 points. The benchmark S&P 500 lost 0.6% while the tech-heavy Nasdaq was just barely in the red, falling 0.07%.

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Walmart’s results weighed on other members of the retail space, with Target (TGT) falling almost 3%, Kroger (KR) losing 4%, and Costco (COST) dropping about 1.8% to start the week. Shares of Amazon (AMZN), however, gained 1.4% on Tuesday in a down market.

On Wednesday, investors will have a calmer earnings calendar but some economic news to digest, with the minutes from the most recent Federal Reserve meeting due out at 2:00 p.m. ET, while the January reading on existing home sales and the initial looks at service sector and manufacturing activity in February due out in the morning.

On the earnings side, Garmin (GRMN), Dish Network (DISH), Host Hotels (HOST), and Cheesecake Factory (CAKE) will be the biggest names reporting.

Earnings from The Cheesecake Factory will be a highlight for investors after the market close on Wednesday. REUTERS/Fred Prouser
Earnings from The Cheesecake Factory will be a highlight for investors after the market close on Wednesday. REUTERS/Fred Prouser

BlackRock upgrades U.S. stocks

BlackRock (BLK), the world’s largest asset manager, upgraded its outlook on the U.S. stock market on Monday.

Writing in a note as equity markets in the U.S. were closed in observations of the Presidents Day holiday, BlackRock’s Richard Turnill said the firm took its view on the U.S. stock market to overweight from neutral on the back of extremely strong earnings revisions that have been announced during the fourth quarter earnings period.

“Our U.S. upgrade boils down to a fundamental story underpinned by earnings growth,” Turnill said. “An added bonus: U.S. valuations look slightly more attractive after the February stock market swoon. Economic strength was already changing the tone of earnings momentum, but U.S. tax cuts and government spending plans lit a fire under the trend.”

Turnill cited the following chart, which shows the huge upward earnings revision made this quarter and said more U.S. large cap companies are giving positive outlooks relative to those giving negative outlooks than at any point since BlackRock’s data series began in 1988.

 

Earnings revisions have been overwhelming positive during fourth quarter earnings season, leading BlackRock to upgrade its view on the U.S. stock market. (Source: BlackRock)
Earnings revisions have been overwhelming positive during fourth quarter earnings season, leading BlackRock to upgrade its view on the U.S. stock market. (Source: BlackRock)

The call from BlackRock is notable for a few reasons, not the least of which is because with about $5 trillion in assets under management, how the firm sees prospects for the world’s largest stock market is almost certain to impact sentiment.

But the call also comes at a very interesting time for markets. Stocks have bounced hard off a low hit on February 8 following a sharp, abrupt 10% decline. Additionally, some investors have begun to ask questions about the “fundamentals” — i.e. economic growth, earnings growth, and tax cuts — and whether they put the market on ground as solid as has been assumed by so many.

The view from BlackRock is a resounding yes. “We believe the coming positive effects of new U.S. tax and spending plans are still under-appreciated by markets,” Turnill said.

“Valuations are certainly still at the top end of their historical range and we see little scope for equity multiples in the U.S., or most other regions, to expand further. But we find earnings growth matters more than valuations over shorter time horizons at this stage of the bull market.”

We’ve written recently about how work out of Bank of America Merrill Lynch shows that stock returns don’t often coincide with really strong earnings periods. Which makes some sense — stock markets anticipate strong results rather than react to them in real time.

The view from Turnill, however, essentially argues that this time is different.

The tax cuts passed by the Trump administration late last year add additional fuel to a market rally that was already responding to strong economic growth and solid earnings trends. Unlike other bull markets, then, when multiple-expansion — that is, stocks rising in price as investors assume ever better future results — is needed to drive prices higher in the final stages, this market is getting a boost on bottom line.

Which, to most analysts, makes the attractiveness of stocks plain to see. How the market takes these signals is another question.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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