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3 Things to Watch in the Stock Market This Week

By Demitri Kalogeropoulos – Jul 10, 2016 at 7:41AM

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Why Wells Fargo, Yum Brands, and CSX stocks could make big moves over the next few trading days.

Stocks rose to a fresh 2016 high last week and nearly touched a new all-time record just weeks after the Brexit vote sent indexes tumbling. The Dow Jones Industrial Average (^DJI 0.01%) and the S&P 500 (^GSPC 0.20%) each rose by over 1% in the last five trading days. Investors are now up by roughly 4% for the year:

^SPX Chart

^SPX data by YCharts.

For the week ahead, stocks that could make big moves this week include Yum Brands (YUM -0.62%), CSX (CSX -0.33%), and Wells Fargo (WFC 0.29%). Here's what investors should be watching for in these companies' quarterly reports.

Wednesday, July 13: Yum Brands' margin

Yum Brands, the company behind KFC, Pizza Hut, and Taco Bell, will kick things off with its earnings release before the market opens on Wednesday. The fast-food chain's stock is having a good year, up 15% so far.

Image source: Getty Images.

At its last quarterly check-in, Yum had plenty of good news for investors to digest. Revenue and profitability rose across each of its brands and geographies, which powered a 14% spike in overall earnings. A rebound in the (soon to be spun off) China division helped, but so did solid growth in the U.S. Pizza Hut segment that managed 5% higher comps, while boosting its operating margin to 33% of sales from 30% a year ago.

Thanks to that positive momentum, investors are ratcheting up their expectations for profit growth. Yum should improve operating earnings by 12% this year, up from management's original 10% target. Challenges ahead include a fiercely competitive industry, and a complex spinoff of Yum's China business. Yet with comps and operating margins headed broadly higher, shareholders could enjoy solid returns in the coming quarters.

Wednesday, July 13: CSX's volume

Railroad giant CSX announces earnings after the market closes on Wednesday, and Wall Street is bracing for bad news. Sales are projected to drop 11%, as earnings slump by 20%, to $0.45 per share.

CSX has seen higher demand in transportation needs for the automotive and minerals industries, yet that hasn't been enough to offset huge drops in coal and agricultural sectors that are hurting from slumping commodity prices and a stronger U.S. dollar. Executives expect those weak trends to continue through 2016.

On the plus side, CSX is holding the line on prices, which is helping protect operating profits. Cost cuts are also producing a leaner enterprise, as management targets cutting $250 million out of annual expenses. These moves won't insulate the company from a cyclically weak operating environment like this, but they do lay the foundation for stronger earnings once growth picks up again.

Friday, July 15: Wells Fargo's loan portfolio

Wells Fargo will post its second-quarter earnings results before the opening bell on Friday. Consensus estimates call for the bank to announce a 2% profit drop to $1.01 per share, as low interest rates and volatility in the energy industry continue pressuring earnings. Still, that result would be enough for WFC to significantly outperform banking rivals who are expected to post profit declines of as much as 24% this quarter.

Image source: Getty Images.

Beyond the bottom-line figures, investors will be looking for improvements in Wells Fargo's loan portfolio, which rose by a solid 7% in Q1. Total deposits should also tick higher after reaching $1.2 trillion.

Finally, capital levels are important to follow, because they are the ultimate source of cash returns to shareholders through dividends and stock repurchases. Wells Fargo is currently playing out about 60% of earnings through those channels, but should find room to significantly boost returns as soon as economic and interest rate conditions improve.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool recommends CSX. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Yum! Brands Stock Quote
Yum! Brands
$129.05 (-0.62%) $0.80
Wells Fargo Stock Quote
Wells Fargo
$42.70 (0.29%) $0.12
Csx Stock Quote
$31.41 (-0.33%) $0.10
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$33,783.61 (0.01%) $2.45
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,971.45 (0.20%) $7.94

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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