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Friday, April 28, 2017

Stocks Down for Day, but Gain Ground for Week

Charles Schwab: On the Market
Posted: 4/28/2017 4:15 PM ET

Stocks Down for Day, but Gain Ground for Week

Despite being solidly higher for the week, U.S. stocks closed Friday's trading session lower amid a plethora of earnings and economic data. Investors processed quarterly results from some tech titans, headlined by releases from Amazon and Alphabet. The first look at Q1 GDP came in below analysts' expectations, a read on consumer sentiment dipped and regional manufacturing activity unexpectedly accelerated. Treasuries were mostly higher, the U.S. dollar was little changed and gold and crude oil prices were higher.

The Dow Jones Industrial Average (DJIA) decreased 41 points (0.2%) to 20,941, the S&P 500 Index declined 5 points (0.2%) to 2,384, and the Nasdaq Composite was 1 point lower at 6,048. In heavy volume, 1.0 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.36 to $49.33 per barrel and wholesale gasoline was unchanged at $1.55 per gallon. Elsewhere, the Bloomberg gold spot price ticked $4.12 higher to $1,268.42 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 99.05. Markets were solidly higher for the week, as the DJIA advanced 1.9%, the S&P 500 Index gained 1.5%, and the Nasdaq Composite rallied 2.3%.

Amazon.com Inc. (AMZN $925) reported Q1 earnings-per-share (EPS) of $1.48, above the FactSet estimate of $1.08, as revenues rose 23.0% year-over-year (y/y) to $35.7 billion, topping the projected $35.3 billion. AMZN issued Q2 revenue guidance that had a midpoint that was below the Street's expectations, while its margin outlook for the quarter was a bit shy of forecasts. Shares traded nicely higher.

General Motors Co. (GM $35) posted Q1 EPS of $1.70, exceeding the estimated $1.47, with revenues growing 10.6% y/y to $41.2 billion, versus the expected $40.6 billion. Shares closed little changed.

Alphabet Inc. (GOOGL $925) announced Q1 earnings of $7.73 per share, north of the estimated $7.38, as revenues excluding traffic acquisition costs (TAC) at the parent of Google rose 22.2% y/y to $20.1 billion, topping the projected $19.8 billion. Shares finished solidly to the upside.

Dow member Microsoft Corp. (MSFT $68) achieved fiscal Q3 EPS of $0.61, or $0.73 ex-items, versus the expected $0.70, as revenues increased 6.0% y/y to $23.6 billion, compared to the forecasted $23.7 billion. MSFT dipped.

Dow component Intel Corp. (INTC $36) reported Q1 profits of $0.61 per share, or $0.66 ex-items, compared to the projected $0.65, as revenues grew 8.0% y/y to $14.8 billion, roughly in line with expectations. INTC issued Q2 guidance with midpoints exceeding estimates, while raising its full-year outlook. However, shares saw pressure amid disappointment among analysts about the company's softer-than-expected operating margin and revenues out of its data center business that missed expectations again.

With a plethora of major earnings reports out of the tech sector, see the rationale behind our outperform rating for the group in Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: Is Retail Really Dead?, on the Markets & Economy page at www.schwab.com. Follow Schwab on Twitter: @schwabresearch.

Starbucks Corp. (SBUX $60) posted fiscal Q2 EPS of $0.45, in line with estimates, as revenues rose 6.0% y/y to $5.3 billion, below the expected $5.4 billion. Q2 same-store sales increased 3.0% y/y, slightly missing the forecasted 3.1% gain. Shares traded lower.

Dow member Exxon Mobil Corp. (XOM $82) announced Q1 EPS of $0.95, above the anticipated $0.85, as revenues rose 29.9% y/y to $63.3 billion, below the estimated $66.4 billion. Shares of XOM advanced.

Dow component Chevron Corp. (CVX $107) reported Q1 EPS of $1.41, including an asset sale gain, which may be impacting comparability to the Street's expected $0.86, with revenues rising 41.9% y/y to $33.4 billion, below the forecasted $34.9 billion. CVX traded in positive territory.

Qualcomm Inc. (QCOM $54) cut its Q3 guidance as Dow component Apple Inc. (AAPL $144) informed the chipmaker that it is withholding payments to its contract manufacturers for the royalties those contract manufacturers owe under their licenses with Qualcomm for sales during the quarter ended March 31, 2017. QCOM said "Apple is improperly interfering with Qualcomm's long-standing agreements with Qualcomm's licensees." QCOM said it will continue vigorously to defend its business model, and pursue its right to protect and receive fair value for its technological contributions to the industry. QCOM shares overcame heavy losses and finished modestly higher.

First read on Q1 GDP misses estimates

The first look (of three) at Q1 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of expansion of 0.7%, from the unrevised 2.1% expansion in Q4, and below the 1.0% growth forecasted by Bloomberg. Personal consumption gained 0.3%, south of the forecasted 0.9% rise and following the unadjusted 3.5% increase recorded in Q4. The sharp slowdown in GDP growth came as the deceleration in personal consumption was met with downturns in private inventory investment and government spending, which were partly offset by an upturn in exports and accelerations in both nonresidential and residential fixed investment.

On inflation, the GDP Price Index came in at a 2.3% rise, above expectations of a 2.0% gain and the unrevised 2.1% increase seen in Q4, while the core PCE Index, which excludes food and energy, moved 2.0% higher, matching expectations and following the unrevised 1.3% advance in Q4.

The deceleration in Q1 GDP growth was expected as that has been the trend for several years, with subsequent quarters accelerating, something Schwab’s Chief Investment Strategist Liz Ann Sonders expects to happen again as discussed in her latest article, ½ Full: Seeing Through a Weak Q1. Liz Ann notes that leading indicators say a lot more about the economy prospectively than backward-looking measures like GDP, and they remain quite healthy. Liz Ann concludes that we are likely just experiencing yet another "soft patch" in an ongoing expansion; so for now, "I am seeing the glass as half full." Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

The final April University of Michigan Consumer Sentiment Index (chart) was revised to 97.0 from the preliminary level of 98.0, where it was expected to remain. However, the index was up slightly compared to March's level of 96.9. Compared to last month, the expectations component improved, while the current conditions component declined. The 1-year and 5-10 year inflation outlooks remained at March's levels of 2.5% and 2.4%, respectively.

The Chicago Purchasing Managers Index (chart) unexpectedly moved further into a level depicting expansion (above 50), after rising to 58.3 in April—the highest level since January 2015—from 57.7 in March, and versus expectations of a decline to 56.2.

The Q1 Employment Cost Index (chart) increased by 0.8% quarter-over-quarter (q/q), north of forecasts of a 0.6% rise, and compared to the 0.5% gain seen in Q4.

Treasuries were mostly higher, with the yield on the 2-year note flat at 1.26%, and the yields on the 10-year note and the 30-year bond ticking 1 basis point lower to 2.28% and 2.95%, respectively. For analysis of 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. Also, Schwab's Vice President of Trading and Derivatives, Randy Frederick and Senior Fixed Income Research Analyst, Collin Martin, CFA, offer the video What's Driving the Ongoing Drop in Long-Term Bond Yields? on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick.

The markets continue to grapple with this week's rough framework of President Trump's tax-reform plan and Congress Facing Possible Government Shutdown—Again as discussed by Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend on the  Insights & Ideas page at www.schwab.com.

European and Asian stocks mixed on earnings and politics

European equities finished mixed, with the markets digesting a plethora of global earnings reports. Moreover, political and geopolitical uncertainty continued to fester despite Sunday's French Presidential election that eased political risk concerns, with comments and actions from U.S. President Trump being eyed, along with his tax-reform details released this week amid the backdrop of the U.S. government trying to avoid a shutdown. Also, Brexit negotiations continue and the nation heads for a vote in June, while a German election looms later this year. For analysis of the political uncertainty on both sides of the pond, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Randy Frederick's video, Political Risk: How Should Investors Respond? on the Insights & Ideas page at www.schwab.com , where you can also find our article, Brexit Begins: What's Next for the U.K?, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? on the International Investing page at www.schwab.com. German retail sales surprisingly ticked higher and Spain's Q1 GDP growth topped forecasts, while U.K. Q1 GDP expansion came in a bit shy of estimates. The euro and British pound gained ground on the U.S. dollar, while bond yields in the region were mostly higher.

Stocks in Asia finished mixed following a flood of mixed global earnings data, while U.S. trade uncertainty and geopolitical concerns remain following comments and actions from President Trump. 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. Japanese equities declined as the yen continued to claw back some early week softness, while earnings in the region disappointed and economic data showed industrial production fell more than expected, vehicle production slowed and headline consumer price inflation came in cooler than expected. However, the nation's retail sales unexpectedly rose. Chinese stocks continued to be hamstrung by regulatory concerns, with shares trading in Hong Kong declining, though mainland listings ticked higher. Australian securities finished flat, while equities in South Korea and India traded lower.

Earnings and eased French political risk concerns spark rally

U.S. stocks posted a back-to-back weekly gain that has pushed April into positive territory as the first round of the French Presidential election eased political risk concerns to kick the week off in rally mode. The jump was extended with Dow members Caterpillar Inc. (CAT $103) and McDonald's Corp. (MCD $140) setting a positive tone for the busiest week of earnings season. For the 287 companies in the S&P 500 that have reported earnings thus far, about 65% have topped revenue expectations and roughly 81% have bested earnings projections, per data compiled by Bloomberg. Technology stocks were among the best performers, along with health care and consumer discretionary issues. Financials were also solidly higher, with Treasury yields recovering from a recent bout of pressure. The energy sector eked out a gain, amid some improved earnings results and even as crude oil prices were choppy, with bullish oil inventory data being met with festering supply concerns.

However, the divergence between "hard" and confidence/survey-based "soft" data continued, with March durable goods orders and Q1 GDP missing forecasts, while consumer sentiment figures remained elevated. As such, the U.S. dollar extended a recent soft patch. The markets demonstrated some relative resilience in the face of U.S. political/trade uncertainty, with President Trump offering his tax-reform framework, making comments and taking some action regarding trade relations, while the government approved to extend the deadline to avoid a shutdown by a week. Finally, the markets shrugged of exacerbated geopolitical tensions with North Korea.

This brings us to next week, with earnings continuing to pour in and the economic calendar setting up to deliver looks at activity on the heels of the sluggish Q1, with April readings on the ISM Manufacturing and non-Manufacturing Indexes, and domestic auto sales, followed by Friday's key nonfarm payroll report. The headlining event will likely be Wednesday's Federal Open Market Committee's (FOMC) monetary policy decision, expected not to deliver another rate hike and be sans updated economic projections and press conference by Chairwoman Janet Yellen. However, the statement could be highly scrutinized for clues to the timing of future rate hikes.

As noted in the latest Schwab Market Perspective: Should Sharp Sentiment Shifts Mean a Change in Strategy?, U.S. equities turned around 180 degrees on a reduction in investor fear that had been building. We believe this is a positive shift, but underlying fundamentals haven't changed. Recent soft economic data contributed to the earlier stock market slump, but economic growth continues to muddle through, and a recession doesn't appear imminent. Putting too much emphasis on political risk globally could be one of the bigger risks facing investors in the current environment. Read more on the Markets & Economy page at www.schwab.com.

Along with a plethora of global manufacturing and services PMI reports, headlined by the eurozone, China and Japan, next week's international economic calendar will also bring the Reserve Bank of Australia's monetary policy decision, along with preliminary eurozone CPI and Q1 GDP.

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