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Tuesday, April 25, 2017

Rally Continues Courtesy of Profit Reports

Charles Schwab: On the Market
Posted: 4/25/2017 4:15 PM ET

Rally Continues Courtesy of Profit Reports

A number of upbeat earnings reports from Dow members gave the U.S. equity markets additional sustenance to add to yesterday's rally that was fueled by the results from the French Presidential election. Treasury yields added to their recent uptick, again benefitting financials, and crude oil ticked higher, while gold and the U.S. dollar were lower. On the economic front, Consumer Confidence slipped from a multi-year high, while new home sales surprisingly rose.

The Dow Jones Industrial Average (DJIA) soared 232 points (1.1%) to 20,996, the S&P 500 Index increased 14 points (0.6%) to 2,387, and the Nasdaq Composite broke above the 6,000 mark for the first time ever, rising 42 points (0.7%) to 6,025. In moderately-heavy volume, 930 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.33 higher to $49.56 per barrel and wholesale gasoline was unchanged at $1.63 per gallon. Elsewhere, the Bloomberg gold spot price fell $12.38 to $1,263.93 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 98.83.

Dow component Caterpillar Inc. (CAT $104) posted 1Q earnings-per-share (EPS) of $0.32 per share, or $1.28 ex-items, versus the forecasted $0.63, as revenues increased 3.8% year-over-year (y/y) to $9.8 billion, north of the expected $9.3 billion. CAT raised its full-year outlook. The company noted encouraging signs but pointed out that there continues to be uncertainty across the globe, potential for volatility in commodity prices and weakness in key markets. Shares rallied.

Dow member McDonald's Corp. (MCD $142) posted 1Q earnings of $1.47 per share, topping the expected $1.34, as revenues decreased 4.0% y/y to $5.7 billion, exceeding the forecasted $5.5 billion. Global same-store sales rose 4.0% y/y, above the expected 1.0% gain. The company said it saw a strong start to 2017, with positive same-store sales across all segments, higher global guest counts and enhanced profitability. MCD traded nicely higher.

Dow member 3M Co. (MMM $195) reported 1Q EPS of $2.16, above the FactSet estimate of $2.07, with revenues rising 3.7% y/y to $7.7 billion, topping the projected $7.5 billion. MMM raised its full-year guidance and shares were higher.

Dow member DuPont (DD $82) announced 1Q earnings of $1.52 per share, or $1.64 ex-items, compared to the projected $1.38, as revenues rose 5.0% y/y to $7.7 billion, above the estimated $7.5 billion. DD issued 2Q guidance that came in just shy of expectations. Shares were nicely higher.

Dow component Coca-Cola Co. (KO $43) reported 1Q EPS of $0.27, or $0.43 ex-items, versus the forecasted $0.44, with revenues declining 11.0% y/y to $9.1 billion, above the estimated $8.9 billion. KO raised the lower end of its full-year earnings outlook. Shares dipped.

Shares of Express Scripts Holding Co. (ESRX $60) fell after the pharmacy benefit management company announced that it will lose its biggest customer Anthem Inc. (ANTM $172) when their current contract expires in 2019. The two companies have been in a legal dispute regarding what ESRX has been charging ANTM for drugs. The news is overshadowing ESRX's earnings report and increased guidance.

Consumer Confidence dips from multi-year high, housing data remains upbeat

The Consumer Confidence Index (chart) declined to 120.3 in April from 124.9 in March, which was the highest level since December 2000, and compared to the Bloomberg estimate of a dip to 122.5. Sentiment toward the present situation and expectations of business conditions for the next six months both decreased from elevated levels. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—dipped to 11.7 from the 12.8 level posted in March.

New home sales (chart) rose 5.8% month-over-month (m/m) in March to an annual rate of 621,000, the highest since July 2016, above forecasts of 584,000 units, and compared to the downwardly revised 587,000 unit pace in February. The median home price was up 1.2% y/y at $315,100. New home inventory dipped to 5.2 months of supply at the current sales pace. Sales were up m/m in all regions, except the Midwest, but all are higher y/y. New home sales are based on contract signings instead of closings.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.9% gain in home prices y/y in February, versus expectations of a 5.8% increase. Month-over-month (m/m), home prices were up 0.7% on a seasonally adjusted basis for February, in line with forecasts.

The Richmond Fed Manufacturing Activity Index slipped but remained solidly in expansion territory (a reading above zero), after declining to 20 for April from the 22 posted in March, which was the highest since April 2010, and versus expectations of a 16 reading.

For a look at the housing market and its impact on the sectors, check out Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Housing—Building Bubble or Growing Trouble?, on the Markets & Economy page at www.schwab.com. Follow Schwab on Twitter: @schwabresearch.

Treasuries added to yesterday's decline that came in the wake of the reaction to the French Presidential election that appeared to ease political risk concerns. The yield on the 2-year note gained 4 basis points (bps) to 1.27%, while the yield on the 10-year note increased 3 bps to 2.31%, and the 30-year bond rate rose 5 bps to 2.98%. For a look at the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, Three Reasons to Own Bonds When the Fed is Raising Interest Rates on the Markets & Economy page at www.schwab.com. Follow Kathy on Twitter: @kathyjones.

The markets remain optimistic regarding progress made on President Trump's tax-reform plans, of which we are expected to get some details tomorrow. However, political uncertainty remains elevated as discussed by Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend in his latest article, Congress Facing Possible Government Shutdown—Again, on the Insights & Ideas page at www.schwab.com.

Finally, ahead of this week's first look at Q1 GDP, which is expected to show growth slowed from Q4, see Schwab’s Chief Investment Strategist Liz Ann Sonders' latest article, ½ Full: Seeing Through a Weak Q1 on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Tomorrow's economic calendar will be light, with the only item of note being MBA Mortgage Applications.

Europe builds on yesterday's strong gains, Asia joins global rally on French election

European equities modestly extended yesterday's sharp rally that came courtesy of eased political risk after the first round of the French Presidential election suggested pro-Europe, mainstream candidate Emmanuel Macron is poised to defeat anti-EU Marine Le Pen in the final vote on May 7th. For analysis of the European political front, which includes a recently approved U.K. vote and a German election later this year, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's videos, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? on the Insights & Ideas page at www.schwab.com. Also, check out Director of International Research, Michelle Gibley's CFA, article, Europe Votes: Could More Countries Reject the EU? on the International Investing page at www.schwab.com. The markets also found support from some upbeat earnings reports on the both sides of the pond. Healthcare stocks led to the upside, aided by earnings results from Novartis AG (NVS $76), while technology issues also strengthened, even as SAP SE (SAP $102) gave up early gains that followed the German software company's sales that topped estimates for the fourth-straight quarter, per Bloomberg. The euro and British pound finished higher versus the U.S. dollar and bond yields gained ground.

Stocks in Asia finished higher after jumps in the U.S. and Europe yesterday as the global markets appeared to breathe a sigh of relief after the first round of the French Presidential election eased concerns about the country's future as a member of the European Union. Stocks are shrugging off heightened geopolitical concerns focused on North Korea, and Schwab's Jeffrey Kleintop, CFA, offers timely commentary in his article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, while he also delivers a look at the global landscape in his article, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com. Continued weakness in the yen helped Japanese equities to extend yesterday's rally, while stocks in mainland China advanced, showing some modest resiliency in the face of heightened regulatory crackdown uneasiness, and those traded in Hong Kong jumped amid the cooled political concerns and ahead of some trade data. After the closing bell, Hong Kong's import and export growth exceeded estimates for March. Meanwhile, securities in India and South Korea finished higher as well. Markets in Australia were closed for a holiday.

Like the U.S., tomorrow's international economic calendar will be sparse, with CPI from Australia and Japan's All-Industry Index the major reports slated for release.

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