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Tuesday, October 25, 2016

Yesterday's Gains Wash Away in a Flood of Earnings Data

Charles Schwab: On the Market
Posted: 10/25/2016 4:15 PM ET

Yesterday's Gains Wash Away in a Flood of Earnings Data

U.S. stocks traded lower amid a deluge of divergent corporate earnings reports, while crude oil prices were also under pressure and a read on domestic consumer confidence dropped more than expected. Treasuries were mixed, gold was higher and the U.S. dollar was nearly unchanged. In overseas developments, European equities dipped and stocks in Asia were mixed as the global markets continue to grapple with world monetary and political ambivalence.

The Dow Jones Industrial Average (DJIA) decreased 54 points (0.3%) to 18,169, the S&P 500 Index was 8 points (0.4%) lower at 2,143 and the Nasdaq Composite lost 26 points (0.5%) to 5,283. In moderate volume, 820 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.56 to $49.96 per barrel, wholesale gasoline was unchanged at $1.49 per gallon and the Bloomberg gold spot price gained $9.52 to $1,273.96 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was mostly flat at 98.76.

General Motors Co. (GM $32) reported 3Q earnings-per-share (EPS) ex-items of $1.72, above the $1.48 FactSet estimate, as revenues rose 10.3% year-over-year (y/y) to $42.8 billion, compared to the expected $39.0 billion. GM said it expects full-year EPS to be at the high end of its prior range. However, analyst focus appeared to be on the automaker's performance in Europe and its Chief Financial Officer Chuck Stevens noted that due to the U.K. Brexit vote and ensuing weakness in the British pound, breaking even this year is going to be very challenging. Shares finished solidly lower.

Dow member 3M Co. (MMM $166) posted 3Q profits of $2.15 per share, one penny north of forecasts, with revenues flat y/y at $7.7 billion, roughly in line with projections. MMM lowered the high end of its full-year profit outlook. Shares moved lower.

Dow component Caterpillar Inc. (CAT $84) announced 3Q EPS ex-items of $0.85, exceeding the expected $0.76, as revenues declined 16.4% y/y to $9.2 billion, below the forecasted $9.9 billion. CAT lowered its full-year EPS and revenue guidance. Shares traded to the downside.

Dow member DuPont (DD $70) reported 3Q earnings ex-items of $0.34 per share, topping the estimated $0.21, with revenues rising 1.0% y/y to $4.9 billion, roughly in line with forecasts. DD increased its full-year profit outlook. Shares declined.

Dow component Merck & Co. Inc. (MRK $62) posted 3Q EPS ex-items of $1.07, topping the estimated $0.99, with revenues rising 5.0% y/y to $10.5 billion, exceeding the projected $10.2 billion. MRK raised its earnings guidance for the year. Eli Lilly and Co. (LLY $78) announced 3Q earnings ex-items of $0.88 per share, below the forecasted $0.96, as revenues rose 5.0% y/y to $5.2 billion, versus the estimated $5.3 billion. LLY reaffirmed its full-year EPS outlook. MRK gained ground and LLY ticked higher. 

Dow member Procter & Gamble Co. (PG $87) posted fiscal 1Q earnings ex-items of $1.03 per share, versus the expected $0.98, as revenues were unchanged y/y at $16.5 billion, roughly in line with forecasts. PG reaffirmed its full-year guidance. Shares were nicely higher.

Dow component Visa Inc. (V $82) announced fiscal 4Q EPS ex-items of $0.78, topping the expected $0.73, with revenues increasing 19.0% y/y to $4.3 billion, due to the inclusion of Europe and continued growth in payments volume and processed transactions, compared to the estimated $4.2 billion. V traded lower.

Dow member United Technologies Corp. (UTX $101) reported 3Q EPS ex-items of $1.76, above the forecasted $1.66, with revenues increasing 4.0% y/y to $14.4 billion, exceeding the expected $14.3 billion. UTX raised the low end of its full-year profit outlook, while reaffirming its revenue guidance. Shares are gained ground.

Under Armour Inc. (UA $33) reported 3Q EPS of $0.29, above the expected $0.25, as revenues rose 22.0% y/y to $1.5 billion, roughly in line with forecasts. UA reaffirmed its full-year revenue outlook. Shares fell sharply as some analysts expressed concerns about the slowdown in North American sales growth during the quarter and as the company's revenue growth forecast for 2017 and 2018 disappointed the Street, along with its warning that profit would grow at a slower pace than sales.

Consumer confidence falls

The Consumer Confidence Index (chart) dropped to 98.6 in October from the downwardly revised 103.5 level in September, and compared to the Bloomberg estimate of 101.5. Sentiment toward the present situation and expectations of business conditions both deteriorated. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—declined to 2.2 from the 5.3 posted in September.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Vertigo: Effect of Spiking Healthcare Costs on Consumers, households remain in relatively good shape, with wages and incomes rising and debt levels/debt servicing costs low. But this upward pressure on inflation bears watching. Remember, consumer spending drives nearly 70% of US economic growth. When inflation is rising alongside a robust economy, it doesn't tend to choke off growth. But if it's rising alongside a sluggish economy it puts pressure on the consumer, which in turn pressures the economy. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.1% gain in home prices y/y in August, versus expectations of a 5.0% increase. Month/month (m/m), home prices were up 0.2% on a seasonally adjusted basis for August, above forecasts of a 0.1% increase.

The Richmond Fed Manufacturing Activity Index improved but remained in contraction territory (a reading below zero), increasing to -4 in October from the -8 posted in September, in line with expectations.

Treasuries were mixed, with the yield on the 2-year note gaining 1 basis point (bp) to 0.85%, while the yield on the 10-year note dipped 1 bp to 1.75% and the 30-year bond rate declined 2 bps to 2.50%. 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.

Tomorrow, the U.S. economic calendar  will commence with the weekly MBA Mortgage Applications report followed by wholesale inventories, which are projected to tick 0.1% higher m/m in September. Just after the opening bell, Markit's preliminary Services PMI Index will be released, with economists forecasting an October reading of 52.5, up slightly from September’s 52.3. We will round out the day with some housing data in the form of new home sales, with economists expecting a 1.5% m/m decrease during September to an annual rate of 600,000 units.

The political landscape also remains in focus as the November election approaches, and Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Final Clinton-Trump Debate Sets Up a Sprint to the Finish Line, as part of our election 2016 commentary at www.schwab.com/insights/category/election-2016, where you can also find timely analysis of The Stock Market and Election Cycles. Be sure to follow Schwab on Twitter: @schwabresearch.

Europe lower, Asia mixed

Healthcare stocks led a decline for European equities as the global markets digested a plethora of mixed earnings reports on both sides of the pond. The British pound fell versus the U.S. dollar amid festering Brexit uncertainty and as Bank of England Governor Carney answered questions in the House of Lords on the economic consequences of the Brexit. However, a read on German business confidence improved more than expected in October, on the heels of yesterday's favorable U.S. manufacturing report. The global markets continued to grapple with world political and monetary policy uncertainty and 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 and follow Jeff on Twitter: @jeffreykleintop. The euro ticked higher versus the U.S. dollar and bond yields in the region finished mixed.

Stocks in Asia finished mixed amid a ramp up in earnings reports and yesterday's flood of M&A news and upbeat read on manufacturing activity out of the U.S., while South Korea's disappointing GDP report weighed on its shares. South Korea's 3Q GDP growth slowed to a 2.7% y/y pace from 3.3% in 2Q. 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 Landscapeat www.schwab.com/oninternational. An advance for Japanese equities was aided by some weakness in the yen, while Indian stocks traded lower and Australian securities rose with technology, basic materials and financials leading the way. Equities trading in Hong Kong moved to the downside and mainland Chinese listings ticked higher as traders grappled with increased optimism of further government fiscal stimulus and concerns about the crackdown on the real estate sector.

Tomorrow, the international economic docket will include a consumer sentiment read from China, small business confidence from Japan, the Import Price Index from Germany, retail sales from Italy and house purchase loans for the U.K.

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