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Caterpillar, Coca-Cola, consumer confidence — What you need to know on Tuesday

Myles Udland
Markets Reporter

The busy week for corporate earnings will really kick into high gear on Tuesday.

In the morning, Caterpillar (CAT), Coca-Cola (KO), United Technologies (UTX), Lockheed Martin (LMT), 3M (MMM), and Verizon (VZ) will be among the S&P 500 reporting results before the bell.

Caterpillar, which is a bellwether for global manufacturing activity and could be sensitive to increasing trade tensions between the U.S. and China, will be a closely-watched result for business sentiment in what’s been a choppier first quarter than what was seen during 2017.

Caterpillar earnings on Tuesday will set the tone for investors during the busiest week of first quarter earnings. (AP Photo/Gene J. Puskar)

On the economic data side, readings on home prices from Case-Shiller and the FHFA will cover the housing market, with investors also tracking The Conference Board’s April reading on consumer confidence, which has remained high despite the market volatility that has roiled investors this year.

Investors will also be keeping an eye on shares of Alphabet (GOOGL), as the Google parent company traded higher after its earnings report released following Monday’s close topped expectations, though the stock was roughly unchanged near 5:30 p.m. ET.

On Monday, stocks finished the day little-changed as investors hung on the sidelines ahead of this week’s busy earnings calendar.

Buyback blackout

The stock market in 2018 has had a rough go of it.

As of Monday’s close, both the S&P 500 and the Dow were back in red figures for the year after a choppy close to the week last Friday and a lackluster day on Monday.

And according to strategists at Goldman Sachs led by David Kostin, the choppy trade could continue as we head into earnings season which is accompanied by a blackout in corporations executing new stock buybacks.

“80% of S&P 500 firms are in their buyback blackout windows, which means that volatility will likely remain elevated during the next several weeks,” the firm wrote in a note to clients published Friday. “Since 2000, volatility has typically been higher during blackout periods compared with non-blackout periods given the absence of corporate demand to support share prices.”

In February when stocks fell sharply from an all-time high in just a few days, corporate buyers were seen as buoying markets. That marginal buyer has now left the market.

When this blackout lifts, 2018 should still end up being a strong year for corporate buybacks, with Kostin noting that S&P 500 companies should end up repurchasing $650 billion worth of stock this year, a 23% increase over 2017.

This cash return strategy, however, could wind down in 2019 as companies no longer enjoy the one-time boost from a corporate tax cut and the political climate potentially shifts against corporate investing behavior.

“The outlook for buybacks in 2019 appears less constructive,” Kostin writes.

“We expect cash flows available for buybacks will be smaller than in 2018, as companies lose some of the one-time boost from tax reform, economic growth slows (2.7% to 2.2%), and EPS growth decelerates (12% to 5%). Furthermore, there will be heightened scrutiny regarding how firms are spending the incremental profits that result from lower corporate tax rates.

“On one hand, share repurchases can be an appropriate use of cash if surplus capacity exists and firms lack productive capital investment opportunities. On the other hand, additional profits from tax reform could also be allocated to employees through higher compensation. Wage growth appears to be a key issue for Democrats as we approach the midterm elections. Further political pressure could weigh on the popularity of share repurchases in 2019.”

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

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