Every three months, corporate America gives investors a look at its books — offering updates on how sales and profits fared in the latest quarter, and usually providing a sense of what to expect from the rest of the year.
It can be an important period for the stock market, as traders learn how well their expectations matched up with reality. With the pandemic raging and the recovery floundering, earnings seasons gives investors another bead on the state of the economy.
(Earlier this month, for example, several big banks said they were cutting down reserves meant to protect against a downturn — a clear sign that they’re feeling better about things — and the news helped bolster stocks.)
But the latest earnings season also comes at a time when investors are starting to wonder if the stock market’s rally has gone too far, and whether stocks are in a bubble as prices become increasingly detached from a company’s profits and growth prospects.
How Wall Street reacts to the incoming results could help show how important (or unimportant) earnings, sales and growth are to share prices.
This week is the busiest of the fourth-quarter earnings season, with results expected from a third of the companies in the S&P 500 — including technology giants Microsoft, Apple, Facebook and Tesla. Overall, Wall Street analysts expect that profits at S&P 500 companies will be down 7 percent compared with the fourth quarter of 2019, according to FactSet data.
So far, results from the first 66 companies in the S&P 500 that reported earnings have been slightly stronger than usual. About 88 percent of those companies did better than analysts expected. Wall Street is notorious for underestimating how companies will do, but that share of companies that “beat” is higher than what’s typical.
Strangely, however, investors have seemed downright dismissive of better-than-expected earnings results, and that could be a bad omen for the market.
Usually, when a company does better than expected, its shares rise. But, through Friday, companies that beat expectations have actually underperformed the broader market, according to Bank of America analysts.
Such a reaction is yet another indication that stock prices are becoming increasingly untethered from fundamentals. In fact, Bank of America analysts noted that they haven’t seen this sort of reaction to earnings results since the dot-com bubble was beginning to deflate.
“The last time we saw such a perverse market reaction to earnings was during 2Q 2000 earnings season, after which the S&P 500 fell by 13 percent over the next three months,” they wrote.
Twitter said it had permanently barred Mike Lindell, the chief executive officer of the bedding company MyPillow and a close ally of former President Donald J. Trump, from its service.
The move on Monday night followed numerous tweets by Mr. Lindell promoting debunked conspiracy theories about election fraud.
Mr. Lindell’s Twitter account, which had nearly 413,000 followers, was permanently suspended “due to repeated violations of our Civic Integrity Policy,” said Lauren Alexander, a Twitter spokeswoman, in an email.
Corporate America has moved swiftly to try to turn down the volume on assertions by Mr. Lindell, a major Republican donor and one of the loudest voices perpetuating Mr. Trump’s claims of voter fraud in the Nov. 3 elections. Kohl’s and Bed Bath & Beyond removed MyPillow products from their stores last week.
Mr. Lindell also faces legal action over his claims of voting fraud involving Dominion Voting Systems, the company at the center of one of the more outlandish conspiracy theories about voter fraud.
His account’s suspension is the latest in a series of high-profile bans by Twitter since the company permanently blocked Mr. Trump from its service over concerns that he would use the platform to incite more violence like the storming of the Capitol this month.
After the attack on the Capitol, Twitter said it had updated its rules to more aggressively police false or misleading information about the presidential election. As part of that move, Twitter has moved to suspend the accounts of more than 70,000 people who have promoted content related to QAnon, a fringe pro-Trump group that the F.B.I. has labeled a domestic terrorist threat.
The Senate confirmed Janet L. Yellen to be Treasury secretary on Monday, putting her at the forefront of navigating the fallout created by the pandemic as she advocates for President Biden’s economic agenda.
Ms. Yellen, the former Federal Reserve chair, was confirmed by a vote of 84 to 15 with support from both Republicans and Democrats. She is the first woman to hold the top job at Treasury in its 232-year history.
With the confirmation, she will now be thrust into the middle of negotiations over a potential $1.9 trillion economic aid package that is the chief plank of Mr. Biden’s effort to revive the economy. The size of the plan already met with doubts from some Democrats and Republicans.
Ms. Yellen has been a clear champion of continued government support for workers and businesses, publicly warning that a lack of aid to state and local governments could slow the recovery, much as it did in the aftermath of the Great Recession.
At her confirmation hearing and in written responses to lawmakers, Ms. Yellen echoed Mr. Biden’s view that Congress must “act big” to prevent the economy from faltering and defended using borrowed money to finance another aid package, saying not doing so would leave workers and families worse off.
“The relief bill late last year was just a down payment to get us through the next few months,” Ms. Yellen said. “We have a long way to go before our economy fully recovers.”
In an epic contest between Wall Street traders who bet against stocks and legions of small-scale investors, the small guys are winning.
On Monday, shares of the struggling video game retailer GameStop surged, adding to a recent rally that has lifted the stock by more than 300 percent in January alone and making it a glaring illustration of the growing power of small investors in certain segments of the financial markets. GameStop rallied again in premarket trading on Tuesday, rising another 20 percent.
Shares of companies like GameStop are becoming detached from the kinds of factors that traditionally help benchmark a company’s valuation — like growth potential or profits. Analysts expect the company to report a loss from continuing operations of $465 million for 2020, on top of the $795 million it lost in 2019.
What seems to be fueling this spike is an online community of traders, who congregate in places like Reddit’s “Wall Street Bets” forum and hype up individual trades. Lately, they’ve made buying short-dated call options on GameStop’s shares — an aggressive bet that the shares will rise — a favorite position.
Market analysts and academics say a rush of new money in such short-dated call options can create a sort of feedback loop that drives the underlying share prices higher, as brokerage firms that sell the options have to themselves buy shares to hedge the contracts.
In GameStop’s case, these small investors have found themselves going up against a different group of speculators. The company’s struggles have also made it a favorite target for short-sellers — who bet on a stock’s decline by selling shares they don’t actually own. Short sellers profit when a stock has plunged and they can buy those same shares back at a lower price.
Of course, with GameStop’s shares surging, those investors are losing a lot of money. And their rush to get out of the trade by buying shares can cause a surge in prices, too, called a short squeeze.
On Monday, the small traders on Wall Street Bets and the messaging site Discord were encouraging each other to hold on to their positions as the short-sellers ran for the exits.
“Am I too late to get on the GME rocket?,” one commenter on Wall Street Bets wrote shortly after 10 a.m.
“No buy the dip,” another responded.
On Discord, the message was clear.
“GME ONLY UP,” one commenter wrote.
Bankruptcies fell 40 percent last year in France and Britain, and were down 25 percent on average in the European Union.
By contrast, Chapter 11 bankruptcy filings in the United States rose in the third quarter to the highest level since the 2010 financial crisis, a trend that is expected to continue in 2021, according to an index compiled by the U.S. law firm Polsinelli.
The difference is the enormous sums European countries are spending to keep businesses afloat. But some worry they’ve gone too far; bankruptcies are plunging to levels not seen in decades.
Those statistics are shaping a debate over whether Europe’s strategy of protecting businesses and workers “at all costs” will cement a recovery, or leave economies less competitive and more dependent on government aid when the pandemic recedes.
Letting unviable businesses go under, while painful, will be essential for allowing competitive sectors to thrive, said Jeffrey Franks, the head of the International Monetary Fund’s mission for France.
A wave of bankruptcies “is not something that’s necessarily so bad,” he said. “It’s part of the normal creative destruction process of regenerating economies.”
Budweiser, the beer giant whose commercials featuring Clydesdale horses, croaking frogs and winsome puppies made it one of the most beloved Super Bowl advertisers, is opting out of the game-time broadcast this year for the first time in 37 years to focus on raising awareness for the Covid-19 vaccine.
Budweiser, an Anheuser-Busch company, said Monday that it would donate portions of its advertising budget this year to the Ad Council, a nonprofit marketing group at the helm of a $50 million ad blitz to fight coronavirus vaccine skepticism. Instead of debuting a splashy big-game commercial, as Super Bowl advertisers often do in the weeks leading up to the Feb. 7 match, the beer company released its 90-second online vaccination ad, titled “Bigger Picture.” (Anheuser-Busch will still feature prominently during the game, with ads for several of its other beer brands.)
Other Super Bowl stalwarts, including Coca-Cola, Hyundai and Pepsi, will also be missing onscreen. As the pandemic disrupted the sports industry, many companies hesitated to pay CBS roughly $5.5 million for a 30-second slot during a game that some worried could be delayed or even canceled.
In the Budweiser Covid-19 vaccination ad, the actress Rashida Jones urges viewers to “turn our strength into hope” while the melody of “Lean on Me” plays as inspirational images from the pandemic are shown. Ms. Jones, who recorded her narration while isolated from other people in a Hollywood facility, said in an interview that “obviously people want to be entertained, they want to watch funny commercials,” but “what’s most important is that we prioritize this next phase.”
The Super Bowl advertising season, which usually extends beyond the broadcast into weeks of teasers, celebrity reveals, YouTube debuts and celebratory live events, is more subdued as companies struggle to adopt an appropriate tone after a year full of marketing missteps.
“You can’t pretend like everything’s OK,” Ms. Jones said. “People can sense when brands are exploiting a moment.”
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Leon Black, the chief executive and chairman of Apollo Global Management, announced his plan on Monday to step down as chief executive this year. The move follows an inquiry by the firm that revealed that Mr. Black had paid $158 million to the convicted sex offender Jeffrey Epstein in a five-year period ending in 2017. He had also lent Mr. Epstein more than $30 million, only $10 million of which was paid back, the report found. Mr. Black’s payments effectively bankrolled the lifestyle of Mr. Epstein in the years after his 2008 guilty plea in Florida to a prostitution charge involving a teenage girl.
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The Norwegian Data Protection Authority said on Monday that it would fine Grindr, the world’s most popular gay dating app, 100 million Norwegian Kroner, or about $11.7 million dollars, for illegally disclosing private details about its users to advertising companies. The Norwegian agency said the app had transmitted users’ precise locations, user-tracking codes and the app’s name to at least five advertising companies, essentially tagging individuals as L.G.B.T.Q. without obtaining their explicit consent, in violation of European data protection law.
U.S. markets
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U.S. stock futures indicated indexes on Wall Street would open little changed from Monday. The S&P 500 has drifted near a record high for the past week.
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Janet Yellen was confirmed as Treasury secretary on Monday and investors will be watching how she and the Biden administration move forward a $1.9 trillion stimulus proposal. Over the weekend, lawmakers from both political parties questioned whether such a large package was needed, while others expressed the need to make more aid available quickly.
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Shares in GameStop, a struggling video game retailer, continued to rally in premarket trading on Tuesday. The shares have already jumped 300 percent this year as small investors have piled into options on the company, placing risky bets that the price of the stock will keep going higher.
Europe
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Most European indexes gained, led by corporate deals. Shares in Naturgy Energy, a Spanish utilities company pivoting to renewable energy, rose more than 16 percent after IFM, an investment company, offered to buy a large stake. Shares in EQT, a large Swedish private equity firm, jumped 14 percent after it bought a U.S.-based real estate company, Exeter Property Group.
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The Stoxx Europe 600 index rose 1 percent.
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European stocks and government bonds have proved resilient to the political turmoil in Italy. Prime Minister Giuseppe Conte is expected to resign on Tuesday. He’s struggled to regain support after a junior partner in his coalition government pulled out earlier this month.
British unemployment
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Britain’s unemployment rate rose to 5 percent in the September-November period, the highest level in four and a half years. Although the government’s furlough program has prevented the rate from surging higher, there are some signs that the labor market was losing momentum late last year, during the second wave of the pandemic. For example, the number of job vacancies increased by 81,000, almost half the number from the previous quarter.
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“While the labor market continued to deteriorate, the furlough has held back the tide on jobs losses,” said Nye Cominetti, an economist at the Resolution Foundation, a think tank. “Around one-in-six private sector workers were furloughed during England’s second lockdown in November, and even more are likely to be furloughed today.”
Asia
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Asian stock indexes dropped on Tuesday after China’s central bank withdrew cash from the banking system and an adviser to the central bank warned about bubbles in asset prices including stocks and property.
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The Hang Seng index in Hong Kong closed 2.5 percent lower. On Monday, it had climbed to a one-year high.
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