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Friday, April 22, 2016

Stocks Rebound from Lows to Finish Mixed

Charles Schwab: On the Market
Posted: 4/22/2016 4:15 PM ET

Stocks Rebound from Lows to Finish Mixed

U.S. equities rebounded from session lows to close on both sides of the unchanged mark, though the Nasdaq significantly underperformed its peers courtesy of some disappointing quarterly earnings reports from the tech sector. In light economic news, a preliminary read for U.S. manufacturing activity in April unexpectedly declined, but remained in expansion territory. Treasuries and gold were lower, while the U.S. dollar and crude oil prices were higher.

The Dow Jones Industrial Average (DJIA) increased 21 points (0.1%) to 18,004, the S&P 500 Index was flat at 2,092, and the Nasdaq Composite fell 40 points (0.8%) to 4,906. In moderately-heavy volume, 1.0 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.55 to $43.73 per barrel, wholesale gasoline was $0.02 higher at $1.55 per gallon and the Bloomberg gold spot price declined $14.56 to $1,233.49 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 95.07. Markets were mixed for the week, as the DJIA advanced 0.6% and the S&P 500 Index gained 0.5%, while the Nasdaq Composite decreased 0.7%.

Alphabet Inc. (GOOGL $737), the parent company of Google, reported 1Q earnings-per-share (EPS) ex-items of $7.50, below the $7.96 FactSet estimate, as revenues excluding traffic acquisition costs (TAC) rose 18.4% year-over-year (y/y) to $16.5 billion, versus the expected $16.6 billion. The company's paid clicks rose 29.0% y/y, versus the projected 26.8% gain, while its cost per click fell 9.0%, compared to the estimated 5.8% decline. Shares traded solidly lower.

Dow member Caterpillar Inc. (CAT $78) posted 1Q EPS ex-items of $0.67, one penny below expectations, with revenues falling 25.5% y/y to $9.5 billion, roughly in line with estimates. The company noted that it has seen recent increases in commodity prices, some signs of improvement in construction equipment in China, and better order activity than expected at the world's leading trade fair for many of the industries it serves. However, CAT noted that other parts of its business remain challenged, and it lowered its full-year earnings outlook and reduced the high end of its revenue forecast. Shares closed lower.

Dow component McDonald's Corp. (MCD $126) achieved 1Q earnings of $1.23 per share, above the expected $1.16, as revenues declined 1.0% y/y to $5.9 billion, above the estimated $5.8 billion. Global same-store sales gained 6.2% y/y, above the projected 4.3% increase. MCD lost modest ground.

Dow member General Electric Co. (GE $31) delivered 1Q EPS ex-items of $0.21, above the estimated $0.19, as revenues rose 6.0% y/y to $27.6 billion, below the projected $28.2 billion. GE reaffirmed its full-year earnings outlook. Shares traded lower

Dow component Microsoft Corp. (MSFT $52) announced fiscal 3Q profits ex-items of $0.62 per share, two cents south of forecasts, as revenues rose 2.0% y/y to $22.1 billion, roughly in line with projections. MSFT noted a challenging macro environment, while growth in its Intelligent Cloud business slowed to miss expectations, more than offsetting stronger-than-expected results from its Personal Computing segment. The company issued 4Q revenue guidance that missed expectations. MSFT fell sharply.

Dow member Visa Inc. (V $79) reported fiscal 2Q EPS ex-items of $0.68, one penny above estimates, as revenues increased 6.0% y/y to $3.6 billion, mostly in line with expectations. V lowered its full-year revenue forecast and shares finished lower.

Starbucks Corp. (SBUX $58) posted fiscal 2Q profits of $0.39 per share, roughly in line with expectations, as revenues grew 9.0% y/y to $5.0 billion, mostly matching estimates. Same-store sales rose 6.0% y/y, below the projected 6.5% increase. SBUX's 3Q EPS outlook came in slightly below forecasts, though it raised the low end of its full-year earnings guidance and reaffirmed its revenue growth projection for the year. SBUX traded decisively lower.

Norfolk Sothern Corp. (NSC $91) announced 1Q EPS of $1.29, well above the expected $0.98, with revenues declining 6.0% y/y to $2.4 billion, roughly in line with forecasts. Shares rallied.

Manufacturing growth unexpectedly slows

The preliminary Markit U.S. Manufacturing PMI Index for April surprisingly dipped to 50.8 from March's 51.5 level, and below the 52.0 that economists surveyed by Bloomberg were forecasting, though a reading above 50 denotes expansion in activity.

Treasuries finished lower, with the yield on the 2-year note gaining 1 basis point (bp) to 0.81%, and the yields on the 10-year note and the 30-year bond ticking 2 bps higher to 1.88% and 2.71%, respectively. For our latest analysis on the bond markets see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, Mixed Signals From the Bond Market: Something's Got to Give, at www.schwab.com/marketinsight and follow Kathy on Twitter: @kathyjones.

Europe mostly lower on autos and data, Asia mixed to close out the week

European equities traded mostly to the downside, though oil & gas issues ticked higher on a modest rebound in crude oil prices, while automakers saw some pressure. In economic news, the preliminary Markit Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—unexpectedly dipped to 53.0 in April, from 53.1 in March, and compared to the expected improvement to 53.3. However, a reading above 50 denotes expansion. In other economic news, Italy's industrial sales and orders data came in mixed for February, while the nation's retail sales moved higher for the month. The euro declined versus the U.S. dollar and bond yields in the region were mixed.

Stocks in Asia finished mixed with yesterday's flood of earnings reports and lower crude oil prices weighing on the U.S. markets yesterday. Japanese equities staged a solid advance with the yen dropping late in the day to extend the sizable gains for stocks for the week. The yen came under pressure amid increased speculation that the Bank of Japan could expand its stimulus measures at next week's meeting, while Bloomberg reported that the BoJ could offer banks some negative rate loans. Mainland Chinese stocks rose, snapping a string of losses that has come amid resurfaced liquidity concerns and as traders assess the market's recent run that came courtesy of a plethora of upbeat economic report. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, provides analysis of China in his article, Trust but Verify: Five Independent Indicators of China's Economy, and Schwab's Director of International Research, Michelle Gibley, CFA, offers 5 Reasons China Won't Crash the Global Economy in 2016, at www.schwab.com/oninternational, and follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch. Securities trading in Hong Kong and Australia fell, bogged down by weakness in oil & gas and basic materials issues, while Indian and South Korean equities also declined.

Stocks mixed as earnings season ramps up

The S&P 500 and Dow both ticked higher on the week, with oil prices rising to lift the energy sector. Financials provided support for a second-consecutive week as earnings season ramped up and results out of the sector continued to mostly top forecasts. However, the Nasdaq dropped this week, bogged down by Netflix Inc's. (NFLX $96) 2Q outlook and as technology stocks fell on misses from Alphabet and Dow component Microsoft, as well as a softer-than-expected outlook from Dow member International Business Machines Corp. (IBM $148). So far this earnings season, nearly 82% of the 130 companies that have reported in the S&P 500 have topped profit forecasts, per data compiled by Bloomberg. Treasury yields rallied despite housing starts and building permits missing expectations, and the Philly Fed Manufacturing Index unexpectedly falling back into contraction territory. However, existing home sales rose slightly more than expected and homebuilder sentiment suggested conditions remained good.

Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, notes in his article, Earnings Season for Investors: It's a Marathon, Not a Sprint, we believe the return of earnings growth is a key factor in getting global stocks to move materially higher. Historically, the manufacturing purchasing managers index has been a useful indicator of future profit growth. The broad uptick in this index across most countries during March is encouraging. If these and other recent improvements in indicators of global economic growth are sustained, and the stabilization in commodity prices continues, investor confidence may rise in the eventual return of earnings growth. Read more at www.schwab.com/marketinsight, and follow Jeff on Twitter: @jeffreykleintop.

Fed decision set to join earnings focus

Along with an accelerating earnings season, next week's robust domestic economic calendar will be headlined by the first look (of three) at 1Q GDP, which will follow Wednesday's monetary policy decision from the Federal Open Market Committee (FOMC). As noted in the latest Schwab Market Perspective: The Soft and Frustrating Middle, the U.S. economy continues to trudge ahead at a low growth rate—not able to generate “escape velocity” on the upside, but not looking like a recession. The Fed's extraordinary and unprecedented measures meant to stoke growth have been less effective than anticipated. The April meeting seems to be off the table for a rate hike. But although the odds of a June hike have diminished, we believe it’s still on the table, and that two rate hikes this year are possible. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Other reports on next week's U.S. economic calendar include: new home sales, durable goods orders, the S&P/CaseShiller Home Price Index, Markit's preliminary Services PMI Index, personal income and spending, and the final University of Michigan University Consumer Sentiment Index.

International reports next week include: Australia—consumer price inflation. China—industrial profits. Japan—overall household spending, consumer price inflation, retail sales, industrial production, and the Bank of Japan monetary policy decision. Eurozone—consumer price inflation and advance 1Q GDP, along with German business sentiment, employment change and retail sales. U.K.—advance 1Q GDP.

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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