Charles Schwab: On the MarketPosted: 7/28/2017 4:15 PM ET
Equities Close Out the Week in Mixed Fashion
U.S. stocks finished the trading session mixed with the Dow outperforming its peers after the Senate failed another attempt at healthcare reform and Amazon.com posted disappointing profit figures. A plethora of Dow components reported earnings today, while tobacco stocks were under pressure on the heels of the FDA announcing new plans for cutting the level of nicotine in cigarettes. Treasuries were higher after an advance read on Q2 GDP narrowly missed forecasts, gold and crude oil prices also advanced and the U.S. dollar traded to the downside.
The Dow Jones Industrial Average (DJIA) advanced 34 points (0.2%) to 21,830, the S&P 500 Index was 3 points (0.1%) lower at 2,472, and the Nasdaq Composite declined 8 points (0.1%) to 6,375. In moderate volume, 772 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.67 to $49.71 per barrel and wholesale gasoline was $0.03 higher at $1.65 per gallon. Elsewhere, the Bloomberg gold spot price inched $0.61 lower to $1,259.83 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% lower at 93.29. Markets were mixed for the week, as the DJIA increased 1.2%, the S&P 500 Index was nearly unchanged and the Nasdaq Composite ticked 0.2% lower.
Amazon.com Inc. (AMZN $1,020) reported Q2 earnings-per-share (EPS) of $0.40, below the $1.41 FactSet estimate, as revenues grew 25.0% year-over-year (y/y) to $38.0 billion, above the projected $37.2 billion. AMZN issued Q3 revenue guidance that had a midpoint above the Street's expectations. Shares were solidly lower.
Starbucks Corp. (SBUX $54) posted fiscal Q3 earnings of $0.47 per share, or $0.55 ex-items, versus the expected $0.55, as revenues rose 8.0% to $5.7 billion, below the projected $5.8 billion. Q3 same-store sales increased 4.0% y/y, versus the estimated 4.2% gain, as sales grew 5.0% in the U.S. SBUX issued Q4 EPS guidance that missed forecasts, while it lowered its full-year profit outlook. Shares fell.
Dow member Merck & Co. Inc. (MRK $64) announced Q2 EPS of $0.71, or $1.01 ex-items, versus the estimated $0.87, as revenues increased 1.0% y/y to $9.9 billion, north of the $9.8 billion expectation. MRK reaffirmed its full-year EPS outlook, while raising its revenue guidance. Shares ticked higher.
Dow component Exxon Mobil Corp. (XOM $80) reported Q2 EPS of $0.78, compared to the expected $0.84, as revenues rose 9.0% y/y to $62.9 billion, versus the projected $61.3 billion. Shares closed lower.
Dow member Chevron Corp. (CVX $108) posted Q2 profits of $0.77 per share, below the estimated $0.86, as revenues rose 17.8% y/y to $34.5 billion, above the forecasted $33.0 billion. CVX traded higher.
Dow component Intel Corp. (INTC $35) announced Q2 EPS of $0.58, or $0.72 ex-items, compared to the forecasted $0.68, as revenues grew 14.0% y/y to $14.8 billion, north of the expected $14.4 billion. INTC issued Q3 guidance that topped projections and raised its full-year outlook. INTC traded higher.
Tobacco stocks fell to pressure the consumer staples sector as the U.S. Food and Drug Administration (FDA) announced new plans for tobacco and nicotine regulation, including the pursuit of cutting nicotine in cigarettes to non-addictive levels.
First look at Q2 shows growth accelerated less than expected
The first look (of three) at Q2 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of expansion of 2.6%, from the downwardly revised 1.2% expansion in Q1, and below the 2.7% growth forecasted by Bloomberg. Personal consumption gained 2.8%, matching forecasts and following the upwardly adjusted 1.9% increase recorded in Q1.
On inflation, the GDP Price Index came in at a 1.0% rise, below expectations of a 1.3% gain and the upwardly revised 2.0% increase seen in Q1, while the core PCE Index, which excludes food and energy, moved 0.9% higher, above expectations of a 0.7% gain, and following the downwardly adjusted 1.8% advance in Q1.
Along with personal consumption, the accelerated Q2 growth came as the decline in private inventory investment eased and federal government spending turned higher. Also, although nonresidential fixed investment decelerated, investment in equipment jumped, suggesting improved business sentiment may have bolstered capital spending. Residential spending dropped after a strong Q1, reflecting the growing headwinds facing the housing sector. State and local government spending turned lower and Imports—a subtraction to GDP—increased, while growth in exports downshifted.
The report adds credence to Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, outperform rating on the technology sector as discussed in the latest Schwab Sector Views: One half down, one to go! Brad adds that we currently have a modestly pro-cyclical stance, which means that our current calls are geared to perform better as the economy grows. And for now the economy appears to be on a relatively stable growth path that shows few signs of ending in the foreseeable future as depicted by the continued uptrend in the Index of Leading Economic Indicators. Read more on the Markets & Economy page and be sure to follow us on Twitter: @schwabresearch.
The Q2 Employment Cost Index (chart) rose by 0.5% q/q, south of forecasts of a 0.6% rise, and compared to the 0.8% gain seen in Q1.
The final July University of Michigan Consumer Sentiment Index (chart) was revised higher to 93.4 from the preliminary level of 93.1, versus forecasts of 93.2. But the index is down versus June's level of 95.1. Compared to last month, the expectations component dipped, while the current conditions component improved. The 1-year inflation outlook remained at June's 2.6% rate, while the 5-10 year forecast ticked higher to 2.6% from 2.5%.
Treasuries traded modestly higher, with the yields on the 2-year and 10-year notes decreasing 2 basis points (bps) to 1.35% and 2.29% respectively, while the yield on the 30-year bond dipped 3 bp to 2.89%.
Bond yields and the U.S. dollar experienced some choppiness following this week's unchanged Fed monetary policy decision, as discussed by Schwab's Chief Investment Strategist Liz Ann Sonders in her latest article, Fed Keeps it on the QT. Liz Ann notes that the decision was unanimous, and the addition of the words "relatively soon" point to a September start point to balance sheet shrinkage, or quantitative tightening (QT). Next up is the Jackson Hole annual conference, at which Yellen will speak, which could provide an opportunity to further steer the consensus around QT's timing. There is a September timing risk however, given that we could be in the midst of a debt ceiling stand-off, so stay tuned. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.
For a look at the bond markets and the declining U.S. dollar, see Schwab's Chief Fixed Income Strategist Kathy Jones' article, Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer' on the Fixed Income page at www.schwab.com as well as her commentary, Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.
Europe and Asia mostly lower as sentiment hits headwinds
European equities finished mostly lower, with the euro and British pound rising versus the U.S. dollar. Uneasiness seemed to flare up, with the tech sector leading to the downside on the heels of yesterday's late-day rollover in the U.S. Also, another failed attempt at U.S. healthcare reform exacerbated political uncertainty. The stock markets shrugged off a ten-year high read on eurozone economic confidence, accelerating Spanish GDP growth and stronger-than-expected German inflation figures. Bond yields in the region rose following the economic data. For a look at global investing, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, An important benefit to global investors is back after 20 years where he notes that the degree to which the world's stock markets move in sync with each other has fallen to the lowest level in 20 years. Jeff adds that the lower correlation enhances the risk-reducing benefits of diversification, which may be especially good news right now since stocks could be due for a pullback. Read more on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. Also, Jeff and Schwab's Vice President of Trading and Derivatives Randy Frederick offer the video, Political Risk: How Should Investors Respond?, on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick.
Stocks in Asia finished mostly lower amid an apparent flare-up in risk aversion following yesterday's tech rollover in the U.S. and another failed attempt at healthcare reform late last night in the U.S. The yen gained ground to weigh on Japanese equities. Japan also released national consumer inflation figures for June, which rose in line with forecasts, while its July read on core consumer inflation in Tokyo came in slightly above estimates. Chinese stocks ticked higher, but shares in Hong Kong declined as the aforementioned headwinds were met with some earnings uneasiness as a plethora of key results loom. Australian securities dropped amid broad-based weakness, led by healthcare. South Korean equities fell and Indian stocks decreased, with both indexes pulling back from recent all-time highs. For more on the emerging markets, see Schwab's Jeffrey Kleintop's CFA, article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at www.schwab.com, where you can also find his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks.
Stocks mixed as earnings meet uncertainties
Stocks finished mixed with the busiest week of earnings season lifting the Dow, courtesy of rallies in Boeing Co. (BA $241), Caterpillar Inc. (CAT $114) and McDonald's Corp. (MCD $156) following their results. Verizon Communications Inc. (VZ $48) also jumped to aid the Dow and telecommunications issues, which led to the upside. However, technology stocks dipped amid some late week volatility as the Street appeared to grapple with valuations following the sector's sharp rally the past year, while Google's parent Alphabet Inc's (GOOGL $959) higher-than-expected traffic acquisition costs fostered margin concerns. However, Facebook Inc (FB $173) managed to rally on its earnings results. Earnings season has been mostly better than expected, as about 73% have topped revenue forecasts and nearly 78% bested earnings expectations of the 287 S&P 500 companies posting results.
Healthcare issues led to the downside amid mixed earnings results, disappointing news from Eli Lilly and Co. (LLY $83) and AstraZeneca PLC. (AZN $30) regarding potential new drugs, and another failed attempt at healthcare reform. Energy issues were standout gainers this week as crude oil prices extended a recent run on signs of global economic growth and aided by more bullish oil inventory data. Bond rates and the U.S. dollar were in focus, with the Treasury yield curve steepening and the U.S. Dollar Index hitting a low not seen since mid-2016. The moves came on relatively upbeat economic data and after the Fed's unchanged monetary policy stance.
Next week, earnings will continue to pour in, but the economic calendar will likely garner attention given the recent action in bonds and currencies and as the markets appear a little less certain that another Fed rate hike this year is in the offing. Personal income and spending, the ISM Manufacturing and non-Manufacturing Indexes, trade balance, Markit's business activity reports and monthly auto sales are notable releases. However, the headliner will likely be Friday's July nonfarm payroll report.
As noted in the latest Schwab Market Perspective: Are Danger Signs Rising…or Will the Bull Run Continue?, a solid earnings season should contribute to a continuation of the bull market in stocks. Dangers are lurking, however, and the possibility of a decent-sized pullback has grown over the past couple of months, in light of monetary policy and geopolitical uncertainties. While we would likely view such a move as healthy, it can be disconcerting. Stay diversified and be prepared to guard against overreacting to any such move. Read more on the Markets & Economy page at www.schwab.com.
International reports due out next week that deserve a mention include: Australia—Reserve Bank of Australia monetary policy decision, retail sales building approvals and trade balance. China—Manufacturing and non-Manufacturing PMIs. India—Manufacturing and Services PMIs and the Reserve Bank of India's monetary policy decision. Japan—industrial production and wage figures. Eurozone—unemployment rate, consumer price inflation, Q2 GDP, Markit's business activity reports and retail sales, along with German factory orders. U.K.—Bank of England monetary policy decision and Markit's business activity reports.