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Tuesday, April 18, 2017

Stocks Taxed by Earnings, Surprise Call for U.K. Election

Charles Schwab: On the Market
Posted: 4/18/2017 4:15 PM ET

Stocks Taxed by Earnings, Surprise Call for U.K. Election

U.S. equities were solidly lower, with financials taking it on the chin following a surprising miss by Dow member Goldman Sachs and continued pressure on Treasury yields. Meanwhile, global political uncertainty also weighed on the markets, exacerbated by an unexpected call for an election in the U.K., which boosted the British pound to the detriment of the U.S. dollar, while crude oil prices declined and gold gained ground.

The Dow Jones Industrial Average (DJIA) declined 114 points (0.6%) to 20,523, the S&P 500 Index lost 7 points (0.3%) to 2,342, and the Nasdaq Composite decreased 7 points (0.1%) to 5,849. In moderate volume, 762 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.24 to $52.41 per barrel and wholesale gasoline was $0.01 lower at $1.71 per gallon. Elsewhere, the Bloomberg gold spot price increased $5.35 to $1,290.06 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—tumbled 0.8% to 99.49.

Dow member Goldman Sachs Group Inc. (GS $216) reported 1Q earnings-per-share (EPS) of $5.15, compared to the $5.31 FactSet estimate, as revenues rose 26.6% year-over-year (y/y) to $8.0 billion, versus the projected $8.4 billion. The company said the operating environment was mixed, with client activity challenged in certain market-making businesses and a more attractive backdrop for underwriting in its investment banking franchise. GS increased its quarterly dividend by 15.4% to $0.75 per share. Shares were decisively lower.

Dow component UnitedHealth Inc. (UNH $169) posted 1Q EPS of $2.23, or $2.37 ex-items, above the forecasted $2.17, with revenues rising 9.4% y/y to $48.7 billion, topping the expected $48.3 billion. UNH raised its full-year guidance and shares were higher.

Dow member Johnson & Johnson (JNJ $122) announced 1Q profits of $1.61 per share, or $1.83 ex-items, compared to the estimated $1.77, as revenues increased 1.6% y/y to $17.8 billion, versus the projected $18.0 billion. JNJ raised its full-year earnings outlook, while narrowing its revenue forecast. Shares finished solidly lower.

Bank of America Corp. (BAC $23) reported 1Q EPS of $0.41, north of the expected $0.35, as revenues grew 7.0% y/y to $22.2 billion, above the projected $21.7 billion. The company said it saw good client activity as consumer spending was up, its wealth management business had strong flows, and investment banking fees rebounded nicely. BAC added that the U.S. economy continues to show consumer and business optimism. Shares gave up early gains and finished nearly flat. 

Netflix Inc. (NFLX $143) posted 1Q earnings of $0.40 per share, three cents above estimates, as revenues rose 34.7% y/y to $2.6 billion, roughly in line with expectations. Domestic and international net streaming subscriber additions came in a bit shy of estimates, while its 2Q guidance for subscriber additions easily exceeded forecasts. NFLX issued a 2Q EPS outlook that was below projections. NFLX traded lower.

United Continental Holdings Inc. (UAL $68) announced 1Q EPS of $0.31, or $0.41 ex-items, versus the forecasted $0.38, with revenues rising 2.7% y/y to $8.4 billion, roughly in line with estimates. The airline said the incident that took place aboard flight 3411 will prove to be a watershed moment for the company and its 1Q performance gives it a lot of confidence. Shares finished lower.

Cardinal Health Inc. (CAH $72) fell sharply after lowering its 2017 guidance in conjunction with its announcement that it agreed to acquire Medtronic PLC's (MDT $80) medical supplies unit for $6.1 billion in cash.

Housing construction activity mixed, industrial production matches forecasts

Housing starts (chart) for March fell 6.8% month-over-month (m/m) to an annual pace of 1,215,000 units, below the Bloomberg forecast of a 1,250,000 unit rate. February starts were upwardly revised to an annual pace of 1,303,000. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, rose 3.6% m/m in March to an annual rate of 1,260,000, after February's upwardly revised 1,216,000 rate, and north of the expected annual pace of 1,250,000 units.

Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his recent Schwab Sector Views: Housing—Building Bubble or Growing Trouble?, for now, we believe the housing market is a modestly positive contributor to overall U.S. economic activity. Although prices have risen, the lack of new building means that there hasn't been a surge of activity in housing that could give a real jolt to housing. At this point, we aren't overly concerned about a bubble building. Read more, as well as Brad's views on other sectors on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.

Industrial production (chart) rose 0.5% month-over-month (m/m) in March, matching estimates, and following February's unrevised flat reading. Manufacturing production declined and mining output ticked higher, while utilities output surged by the largest in the history of the index after two months of drops amid unseasonably warm weather. Capacity utilization increased to 76.1%, compared to February's upwardly revised 75.7%, in line with forecasts. Capacity utilization is 3.8 percentage points below its long-run average.

Treasuries were higher, with the yield on the 2-year note decreasing 4 basis points (bps) to 1.17%, while the yield on the 10-year note fell 8 bps to 2.17%, and the 30-year bond rate fell 7 bps to 2.84%.

Bond yields and the U.S. dollar remain under pressure recently amid flared-up geopolitical and political uncertainty, President Donald Trump's comments that he thought the greenback was getting "too strong," and some cooler-than-expected inflation data.

For a look at the moves in the bond markets, see Schwab's Senior Fixed Income Research Analyst, Collin Martin's, CFA, latest article titled, What Investors Should Know About the High-Yield Bond Rally on the Markets & Economy page at www.schwab.com, along with Collin's and Vice President of Trading and Derivatives, Randy Frederick's video Fed Hiked Interest Rates, So Why Are Bond Yields Still So Low?. Randy and Schwab's Chief Fixed Income Strategist, Kathy Jones also discuss, Three Fed Hikes Seen in 2017: How Should Bond Investors Respond. See these and other videos on the Insights & Ideas page at www.schwab.com. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Finally, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers a look at investing amid heightened geopolitical tensions in his article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop.

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