The fourth quarter earnings season kicks off this coming week. Based on 2021’s first week of trading it seems “cautious optimism” is the tenor for stocks and other risk assets. After briefly reaching a new all-time high of 31,193 Thursday, the Dow Jones Industrial Average have couldn’t sustain that level, indicating things won’t be as easy as they were for stocks in the last few weeks of the 2020. It will take impressive earnings beats and confidence guidance to keeps the momentum going.
On Friday, stocks ended slightly higher, reversing early declines which came in part by the December jobs reports that showed slower-than-expected U.S. jobs and wage growth. That’s not how investors expected the year’s first jobs report to start off. But the reversal and the resiliency of the market remains an encouraging sign of things to come. The Dow closed higher by 56.84 points, or 0.18%, to close at 31,097.97. The S&P 500 index added 20.89 points, or 0.55%, to close at 3,824.68, while the tech-heavy Nasdaq Composite Index gained 134.50 points, or 1.03%, to end at 13,201.98.
The fact that all three major averages posted gains, against a weak jobs report, is notable. But the disappointing jobs report may fuel concerns that the additional COVID relief package won’t be enough to support consumer spending. According to the Labor Department, jobs fell by 140,000 in December, missing estimates which called for a gain of 50,000 jobs. The unemployment rate nonetheless held steady at 6.7%. Not surprisingly, jobs in hospitality accounted for the bulk of job losses, while bars and restaurants also suffered losses.
This has led one prominent analyst to suggest that the economy is now in “reverse” and not just “tapping the brakes.” But it wasn’t all bad news. One positive aspect of the report revealed that the level of permanent job losses in December actually declined, which is an encouraging. All of this goes back to the type of economic recovery we have been debating ever since the pandemic began. Will it be of the “V-shaped” variety or some other letter?
Regardless, the market — still near all-time highs — has shown a level of resilience that has been unimaginable. Analysts aren’t ready to proclaim stocks are cheap.
But with Q4 earnings imminent, investors may quickly forget the downbeat jobs data with upbeat 2021 guidance. Here are the names to keep an eye on this week.
Delta Airlines (DAL) – Reports before the open, Thursday, Jan. 14
Wall Street expects Delta to lose $2.47 per share on revenue of $3.68 billion. This compares to the year-ago quarter when earnings came to $1.70 per share on $11.44 billion in revenue.
What to watch: Delta stock has been one of the better performers of the transporting sector, rising some 50% over the past six months, compared to a 21% gain in the S&P 500 index. These gains have been driven by a combination of factors. Not only did airline traffic end 2020 on a positive note, progress of, and the distribution of, vaccines have turned around investor sentiment that things can get back to “normal” much sooner than expected in 2021. For Delta, the market is applying a premium to the stock, anticipating any increase capacity can help the airline recapture its pre-COVID EPS level of $7 per share. But is that realistic? If not, Delta’s cash burn rate — which its last forecasted at around $12-14 million per day — comes into scrutiny. How the airline reduces the daily cash burn rate on the assumption that the vaccine can (or will) boost air travel will determine the direction of the stock.
JPMorgan Chase (JPM) – Reports before the open, Friday, Jan. 15
Wall Street expects JPMorgan to earn $2.57 per share on revenue of $28.45 billion. This compares to the year-ago quarter when earnings came to $2.57 per share on revenue of $29.21 billion.
What to watch: JPMorgan shares, which declined about 9% in 2020, didn’t end year the way that investors would have liked. But it could have been much worse as JPM stock plunged some 50% at the onset of the pandemic as many companies were forced to close their doors and adjust to heightened restrictions. As such, JPM stock cratered from its $141 high level to its low level of $77. Throughout the year, the bank dealt with weakness in its community and consumer banking segment, which suffered from weak consumer spending. This is on top of the low-interest rate environment that has pressured overall revenues. All of that said, the bank still outperformed the analysts’s expectations, thanks to strong trading revenues, which when combined generated nearly $7 billion in revenue, up 27% year over year. Will these trends continue into 2021?
Wells Fargo (WFC) – Reports before the open, Friday, Jan. 15
Wall Street expects Wells Fargo to earn 59 cents per share on revenue of $18.11 billion. This compares to the year-ago quarter when earnings came to 60 cents per share on revenue of $19.86 billion.
What to watch: We have asked for some time: When will it be time to place a long-term bet on Wells Fargo? We now have that answer. Wells Fargo stock has been a hot commodity among banks, skyrocketing more than 60% over the past two months. While the troubled bank still has some legacy issues to deal with, the market is now willing to look beyond any near-term headwinds. The stock is trading at just ten times two-year forward earnings estimates, which is just above the bank’s five-year historical average of 9.7, making WFC the cheapest stock among its peers. It also helps that the Fed has recently permitted Wells Fargo not only to buy back shares in Q1, but also pay dividends. As it stands, the bank now has tons of catalysts to sustain profitability and return value to its shareholders.
Citigroup (C) – Reports before the open, Friday, Jan. 15
Wall Street expects Citigroup to earn $1.33 per share on revenue of $16.68 billion. This compares to the year-ago quarter when earning were $2.15 per share on revenue of $18.38 billion.
What to watch: Citigroup has been, arguably, the most attractive money-center bank stock in the U.S. over the past several quarters. But it seems the market has suddenly come to this conclusion too, with the stock surging as much as 60% over the past two-and-a-half months — rising from a low of $41 to recent high of $66. But is the bullish thesis still intact? That’s what investors want to know before adding to their positions. Among the major fundamental topics the market must reconcile, what will inflation in a post-COVID banking environment look like? Will inflation be higher or lower than in the previous cycle. This question will determine how Citigroup conducts business, whether profitably, in the next several quarters.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.