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Friday, July 22, 2016

Stocks Pop Higher as Earnings Ramp Up

Charles Schwab; On the Market
Posted: 7/22/2016 4:15 PM ET

Stocks Pop Higher as Earnings Ramp Up

U.S. equities finished the regular trading session higher as investors weighed some mixed earnings reports, headlined by upbeat results from Dow member General Electric. In domestic economic news, Markit's preliminary July manufacturing activity read was better than expected. Treasuries were mixed, gold and crude oil prices were lower and the U.S. dollar rallied. Overseas, stocks in Europe were mixed and equities in Asia were mostly lower as global traders hoped for indications of additional stimulus from the European Central Bank and Bank of Japan.

The Dow Jones Industrial Average (DJIA) advanced 54 points (0.3%) to 18,571, the S&P 500 Index added 10 points (0.5%) to 2,175 and the Nasdaq Composite increased 26 points (0.5%) to 5,100. In moderate volume, 741 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil was $0.56 lower at $44.19 per barrel, wholesale gasoline was unchanged at $1.36 per gallon and the Bloomberg gold spot price decreased $7.46 to $1,323.97 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 97.41. Markets were higher for the week, as the DJIA gained 0.3%, the S&P 500 Index increased 0.6% and the Nasdaq Composite advanced 1.4%.

Dow member General Electric Co. (GE $32) reported 2Q earnings-per-share (EPS) ex-items of $0.51, well above the $0.46 FactSet estimate, as revenues rose 3.0% year-over-year (y/y) to $33.5 billion, versus the expected $31.8 billion. Chief Executive Officer (CEO) Jeffrey Immelt said, “The diversity and scale of our portfolio enabled the company to perform well despite a volatile and slow-growth economy,” adding, “We expect strong organic growth in the second half of the year.” Despite the beat, shares were lower.

Fellow Dow component Boeing Co. (BA $133) warned that it expects to report a $2.1 billion after-tax charge in the 2Q on expenses surrounding its 787 Dreamliner, 787-8 jumbo jet and air tanker for the U.S Air Force. The aircraft manufacturer said it will write off two of the flight-test aircraft at a cost of $847 million. Boeing's CEO said, “These are the right, proactive decisions to strengthen our business going forward." BA traded lower.

AT&T Inc. (T $43) registered 2Q EPS ex-items of $0.72, matching the FactSet estimate, with consolidated revenues, including those from its recent acquisition of DIRECTV, growing 23.0% y/y to $40.5 billion, but below the Street's $40.6 billion forecast. A net loss of 49,000 video subscribers pressured results, as declines in the unit continue to mount as customers are dumping traditional TV packages for lower-cost online-only offerings elsewhere. Shares of T gained ground.

Advanced Micro Devices Inc. (AMD $6) posted a 2Q loss ex-items of $0.05 per share, better than the $0.09 per share shortfall forecasted by analysts, on a 9.0% y/y increase in revenues to $1.0 billion, which topped the Street's $951.3 million estimate. The chip maker said it expects the current quarter to see an 18% y/y rise in sales, plus or minus 3%, as well as growth in the subsequent quarter. AMD closed solidly higher.

Honeywell International Inc. (HON $116) announced 2Q profits ex-items of $1.66 per share, topping the forecasted $1.64, as revenues rose 2.0% y/y to $10.0 billion, mostly in line with estimates. However, shares of HON were under pressure, as the conglomerate said it expects 3Q EPS between $1.67-1.72, compared to analysts' forecasts of $1.72.

Chipotle Mexican Grill Inc. (CMG $442) missed analysts' estimates when it reported 2Q EPS of $0.87, compared to the $0.91 FactSet estimate, as sales at the restaurant chain fell 16.8% y/y to $998.4 million, also shy of the forecasted $1.1 billion, as same-store sales tumbled 23.6%, well below the anticipated 20.6% decline. The company's CEO said, "Our entire company is focused on restoring customer trust and re-establishing customer frequency," adding, "There’s no quick solution to improving our sales and bringing our customers’ trust back." Despite the dismal report, shares finished higher.

Capital One Financial Corp. (COF $67) posted 2Q earnings ex-items of $1.76 per share, ten cents short of the FactSet estimate, as revenues were mostly in line with forecasts calling for $6.3 billion. The company's CEO said it remains well positioned to deliver growth in the future, as well as continue to return capital to shareholders. COF traded lower.

U.S. manufacturing posts better-than-expected increase

The preliminary Markit U.S. Manufacturing PMI Index for July improved to 52.9 from June's downwardly revised 51.3 level, and above the forecasted modest rise to 51.5, with a reading above 50 denoting expansion in activity.

The recent string of upbeat domestic data has helped fuel the recent stock market rally that took the Dow and S&P 500 to all-time highs, as discussed by Liz Ann Sonders in her latest article, 19th Nervous Breakout: Stocks Finally Reach New Highs, at www.schwab.com/marketinsight. As well, you can find the latest Schwab Sector Views: Drilling Down on the Energy Sector by Schwab's Director of Market & Sector Analysis, Brad Sorensen, CFA, where Brad argues the case that the correlation that had emerged between oil prices and stock market performance appears to have started to diminish.

Treasuries were mixed with the yield on the 2-year note up 3 basis points (bps) at 0.70%, the yield on the 10-year note 1 bp higher at 1.57%, while the yield on the 30-year bond was down 1 bp at 2.28%. Bond yields have rebounded as of late from record lows on favorable U.S. economic data, as well as eased U.K. Brexit concerns and expectations of a Fed rate hike this year. For analysis see the video from Schwab's Chief Investment Strategist, Liz Ann Sonders and Managing Director of Trading and Derivatives, Randy Frederick, titled Strong Jobs Report: Recession off the Table but Is Rate Hike Back On?, at www.schwab.com/insights. Follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick. Also, Schwab's Chief Fixed Income Strategist, Kathy Jones offers analysis in her recent article titled, With a Whimper Instead of a Bang: Is the Great Bond Bull Market Over?, at www.schwab.com/marketinsight. Follow Kathy on Twitter: @kathyjones.

Europe mixed, Asia lower

European markets finished mixed, as traders digested a plethora of manufacturing activity reports in the region, as well as yesterday's decision from the European Central Bank (ECB) to leave its monetary policy unchanged where it lacked any clues as to if the ECB will become more aggressive in its stimulus measures following the June vote by the U.K. to leave the European Union (EU), known as a Brexit. Manufacturing data in Germany and the Eurozone as a whole continued to show expansion, despite a slight downtick in the readings, and France saw improvement. However, activity out of the U.K. plunged to a level depicting contraction, further fueling concerns of the economy post-Brexit. Amid the backdrop of heightened volatility in the region as the markets grapple with the impact of a Brexit, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers analysis for investors in his article, After the Brexit Vote: What Lies Ahead for Markets?, and gives us Three Reasons Why Now is Not the Time to Retreat from Global Diversification. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

In other economic news, Italy's retail sales came in well ahead of forecasts, while industrial sales in the nation fell well short of expectations. The euro and the British pound were slightly lower versus the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished lower, as hopes of aggressive stimulus measures from the Bank of Japan (BoJ) were tempered following a radio interview with BoJ Governor Kuroda—that was pre-recorded in June—that doused the notion of so-called helicopter money, as well as inaction by the European Central Bank yesterday to offer any hint of further aid. Japanese equities pared a recent rally, as the comments sent the yen sharply higher. For more on Japan's potential increased stimulus measures see Jeffrey Kleintop's, article, What investors need to know about helicopter money, at www.schwab.com/oninternational. The tempered sentiment toward central bank easing overshadowed an increase in Japan's manufacturing activity, with Markit's preliminary Manufacturing PMI Index showing a reading of 49.0 for July, up from 48.1 in June, and closing in on the 50 level that indicates the demarcation point between expansion and contraction in activity.

Chinese stocks declined despite action from the People's Bank of China (PBoC) where it pegged the yuan 3% higher versus the greenback and while the country's leaders dictated some clear differences on how to reform the country's state-owned enterprises (SOEs) raising contradicting viewpoints of whether to reinforce the sector or to trim SOEs down. Elsewhere, securities in Australia and South Korea dipped, while Indian equities bucked the regional trend, finishing higher in a somewhat subdued session.

Stocks see another weekly advance

U.S. equities managed gains for the week, as the Dow & S&P 500 indexes continued to chart record-high territory, though the blue-chip benchmark ended a nine day winning streak on Thursday. Earnings season began to heat up with financial heavyweights including Bank of America Corp. (BAC $14) and Morgan Stanley (MS $29) and Dow components Goldman Sachs Group Inc. (GS $160) and American Express Co. (AXP $64) all releasing quarterly results that bested analysts' bottom-line expectations. Some tech titans including Dow members International Business Machines Corp. (IBM $162), Microsoft Corp. (MSFT $57) and Intel Corp. (INTC $35) also announced quarterly results that topped forecasts.

As record-highs continued for the equity markets as a whole, the energy sector was unable to spark significant gains and lagged for the week. Schwab's Director of Market and Sector Analysis Brad Sorensen, CFA, shares in his recent Schwab Sector Views: Drilling Down on the Energy Sector, that with the market shifting its focus to the Brexit vote and its immediate aftermath, the energy sector may finally be taking a backseat in the minds of investors and while it may not seize the market's attention the way it used to, the energy sector remains important. Much of the global economy depends on access to oil, and also its price. And we've seen oil prices move considerably in the past two years. Read the rest of Brad's refined assessment of crude, as well as his views on all sectors at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Fed set to conclude monetary meeting prior to GDP release next week

Next week's robust domestic economic calendar will likely be headlined by Friday's first look (of three) at 2Q GDP, which will follow the mid-week monetary policy decision from the Federal Open Market Committee (FOMC), with no changes expected to its current policy stance, while earnings season will continue to ramp-up. Schwab's experts tackle these topics in the latest Schwab Market Perspective: New Records…Same Skepticism, noting that while there’s a near unanimous opinion that the Federal Open Market Committee (FOMC) will stay put at its meeting next week, market expectations for a rate hike later this year have risen over the past couple of weeks, coming closer to what we have believed was the more realistic possibility. Separately, they also point out that commentary from second quarter earnings season has so far been relatively cautious, although the results have been better than the relatively low expectations so far. 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, pending home sales, durable goods orders, the S&P/CaseShiller Home Price Index, Markit's preliminary Services PMI Index, consumer confidence, the Kansas City Fed Manufacturing Activity Index, and the final University of Michigan Consumer Sentiment Index.

Major international economic releases for next week include: Japan—trade data, the Leading Index, CPI, retail sales, industrial production, vehicle production, and the Bank of Japan's monetary policy decision. China—industrial profits. Australia—CPI, PPI, export and import prices and private sector credit. Eurozone—consumer confidence, CPI and 2Q GDP. Germany—CPI, retail sales, import prices, GfK consumer confidence and Ifo business climate survey. U.K.—2Q GDP, GfK consumer confidence, Index of Services and consumer credit.

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