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Tuesday, October 18, 2016

Stocks Gain on Upbeat Earnings

Charles Schwab; On the Market
Posted: 10/18/2016 4:15 PM ET

Stocks Gain on Upbeat Earnings

U.S. equities finished higher following some favorable Chinese lending data, and a plethora of earnings releases, highlighted by Dow members Goldman Sachs and UnitedHealth, along with Netflix. Treasuries ticked higher following mixed reads on inflation and homebuilder sentiment, gold and crude oil prices gained ground, while the U.S. dollar was little changed.

The Dow Jones Industrial Average (DJIA) rose 75 points (0.4%) to 18,162, the S&P 500 Index added 13 points (0.6%) to 2,140 and the Nasdaq Composite jumped 44 points (0.9%) to 5,244. In moderate volume, 724 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.35 higher to $50.29 per barrel, wholesale gasoline was up $0.02 at $1.51 per gallon and the Bloomberg gold spot price gained $6.79 to $1,262.64 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 97.90.

Dow member Goldman Sachs Group Inc. (GS $173) reported 3Q earnings-per-share (EPS) of $4.88, well above the $3.82 FactSet estimate, as revenues grew 19.0% year-over-year (y/y) to $8.2 billion, topping the expected $7.4 billion. Shares finished higher.

Dow component International Business Machines Corp. (IBM $151) posted 3Q profits ex-items of $3.29 per share, exceeding the expected $3.23, with revenues flat y/y to $19.2 billion, above the anticipated $19.0 billion. However, the company's margins were weaker than expected. IBM reaffirmed its full-year EPS and free cash flow outlooks. Shares were solidly lower.

Dow member Johnson & Johnson (JNJ $115) announced 3Q EPS ex-items of $1.68, north of the projected $1.65, as revenues rose 4.2% y/y to $17.8 billion, compared to the forecasted $17.7 billion. JNJ raised the low end of its full-year earnings outlook and reaffirmed its revenue guidance. Shares were lower amid some analyst uncertainty about JNJ's 2017 outlook and sustainability of its sales growth as its blockbuster arthritis treatment, Remicade faces upcoming generic competition.

Dow component UnitedHealth Group Inc. (UNH $143) reported 3Q adjusted EPS of $2.17, north of the anticipated $2.08, as revenues rose 12.0% y/y to $46.3 billion, topping the expected $46.1 billion. UNH raised its full-year profit outlook and shares were nicely higher.

Netflix Inc. (NFLX $119) posted 3Q EPS of $0.12, double the Street's forecasts, as revenues rose 31.7% y/y to $2.3 billion, roughly in line with estimates. NFLX's 3Q streaming subscriber additions easily topped expectations, led by international, while its 4Q forecast for subscribers exceeded expectations. NFLX surged nearly 20%.

United Continental Holdings Inc. (UAL $54) announced 3Q earnings ex-items of $3.11 per share, above the projected $3.07, with revenues decreasing 3.8% y/y to $9.9 billion, roughly in line with estimates. UAL's passenger revenue metric, a key industry gauge, continued to decline due to the stronger U.S. dollar, lower surcharges, reductions from energy-related corporate travel, and declining yields. UAL was higher.

For analysis of earnings and the stock markets, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Three Reasons Stocks May Avoid Another Lost Decade, at www.schwab.com/marketinsight, and follow Jeff on Twitter: @jeffreykleintop.

Consumer price inflation mixed, homebuilder sentiment dips 

The Consumer Price Index (CPI) (chart) was up 0.3% month-over-month (m/m) in September, in line with the Bloomberg estimate, while August's 0.2% increase was unrevised. The core rate, which strips out food and energy, ticked 0.1% higher m/m, below expectations of a 0.2% rise and August's unrevised 0.3% increase. Y/Y, prices were 1.5% higher for the headline rate, matching forecasts, while the core rate was up 2.2%, below projections of a 2.3% increase. August y/y figures showed an unrevised 1.1% rise and an unadjusted 2.3% increase for the headline and core rates respectively. For analysis of the inflation environment on the bond markets, see Schwab's Fixed Income Director Collin Martin's, CFA, article titled, Do TIPS Make Sense When Inflation is Low? and follow Schwab on Twitter: @schwabresearch.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month declined to 63 from September's unrevised 65 figure, matching estimates. Builder confidence remains well above the key 50 mark, which separates good and poor conditions. The NAHB said even with this month's drop, builder confidence stands at its second-highest level in 2016, a sign that the housing recovery continues to make solid progress. However, the NAHB added that builders in many markets continue to express concerns about shortages of lots and labor.

Tomorrow, we will get a look at home construction activity in the form of housing starts and building permits, with starts projected to rise 2.9% m/m in September to an annual rate of 1,175,000 units, while permits are anticipated to increase 1.1% m/m to an annual rate of 1,165,000 units (economic calendar). Also, we will get weekly MBA mortgage applications and the Federal Reserve's Beige Book, an anecdotal look at economic activity across the nation used as preparation tool for the next Federal Open Market Committee (FOMC) monetary policy decision on November 2.

As noted in the recent Schwab Market Perspective: Spinning Our Wheels, after a temporary soft patch in August, economic data has improved. The next couple of weeks will be data heavy and we'll be watching closely to gauge likely Fed policy. For more on our outlook for the housing sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, article, Real Estate Sector: Marketperform. Read both articles at www.schwab.com/marketinsight.

Treasuries were higher, as the yields on the 2-year note and 30-year bond dipped 1 basis point (bp) to 0.80% and 2.51%, respectively, while the yield on the 10-year note is declined 2 bps to 1.75%. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the interest rate environment in her latest article, Are Bond Yields About to Rise?, at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Europe and Asia see broad-based advances

European equities finished broadly higher, with financials and mining issues leading the way on elevated Fed rate hike expectations, some upbeat Chinese lending data, and as earnings reports in the U.S. were relatively favorable. Also, traders awaited Thursday's monetary policy decision from the European Central Bank. The British pound rallied versus the U.S. dollar following a hotter-than-expected read on the nation's consumer price inflation for September. The euro dipped versus the greenback, while bond yields in the region were mostly lower. With volatility likely to persist, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversificationand why Your portfolio may be less diversified than you think. Read these articles, at www.schwab.com/oninternational.

Stocks in Asia rebounded following some upbeat Chinese lending statistics and a pullback in the Japanese yen late in the session, while casino operators recovered some of yesterday's drop. Mainland Chinese equities and those traded in Hong Kong jumped, after the nation reported stronger-than-expected September figures for new yuan loans and aggregate financing—a gauge of total credit issued. The data comes as China will deliver more key economic reports, headlined by 3Q GDP, projected to showed growth remained at 6.7% y/y. For more on China, see Schwab's Director of International Research Michelle Gibley's, CFA, article, 5 Reasons China Won't Crash the Global Economy in 2016, while Schwab's Jeffrey Kleintop, CFA, offers timely analysis of the global economic picture in his article, World Tour: An Around The World Look At the Economic Landscape. Read both articles at www.schwab.com/oninternational, and follow Schwab on Twitter: @schwabresearch. Meanwhile, markets in Japan, Australia, South Korea and India all saw solid gains.

In addition to data out of China, the international economic calendar for tomorrow will include Japan's All-Industry index, PPI from South Korea, and employment data from the U.K.

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