Stocks Advance Ahead of Fed Policy Stance

Charles Schwab: On the Market

Posted: 7/25/2017 4:15 PM ET

Stocks Advance Ahead of Fed Policy Stance

U.S. stocks traded higher, though the Nasdaq was relatively flat, courtesy of a plethora of mostly upbeat earnings reports and as an unexpected jump in Consumer Confidence preceded tomorrow's Fed monetary policy decision. Treasury yields gained ground as additional reports from the domestic docket showed a rise in home sales and better-than-expected regional manufacturing activity. The U.S. dollar overcame early losses and gold was lower. Overseas, European markets were broadly higher.

The Dow Jones Industrial Average (DJIA) advanced 100 points (0.5%) to 21,613, the S&P 500 Index was 7 points (0.3%) higher at 2,477, and the Nasdaq Composite increased 1 point to 6,412. In moderate to heavy volume, 1.1 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.55 to $47.89 per barrel and wholesale gasoline was $0.04 higher at $1.57 per gallon. Elsewhere, the Bloomberg gold spot price decreased $4.75 to $1,250.55 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 94.10.

Alphabet Inc. (GOOGL $969), parent company of Google, reported Q2 earnings-per-share (EPS) of $5.01, above the $4.44 FactSet estimate, as revenues excluding traffic acquisition costs (TAC) rose 19.4% y/y to $20.9 billion, roughly in line with expectations. The TAC figure came in above expectations and weighed on margins, which missed the Street's expectations. Shares traded solidly lower.

Dow member Caterpillar Inc. (CAT $115) posted Q2 EPS of $1.35, or $1.49 ex-items, compared to the estimated $1.26, with revenues rising 9.6% y/y to $11.3 billion, topping the expected $11.0 billion. The heavy equipment maker raised its full-year guidance, citing its first half performance and current quotation and ordering activity. CAT was solidly higher.

Dow component DuPont (DD $85) announced Q2 profits of $0.97 per share, or $1.38 ex-items, versus the expected $1.29, as revenues rose 5.0% y/y to $7.4 billion, topping the forecasted $7.3 billion. DD gained ground.

Dow member United Technologies Corp. (UTX $120) reported Q2 EPS of $1.80, or $1.85 ex-items, versus the projected $1.78, as revenues grew 3.0% y/y to $15.3 billion, mostly in line with forecasts. UTX raised the lower end of its full-year profit outlook and increased its revenue guidance. Shares saw pressure as the company's updated revenue guidance had a midpoint below estimates.

Dow component 3M Co. (MMM $199) posted Q2 profits of $2.58, including a $0.33 per share benefit due to its divestiture efforts that may be impacting comparability to the Street's $2.54 expectation. Revenues rose 1.9% y/y to $7.8 billion, south of the estimated $7.9 billion. MMM raised the low end of its full-year guidance. Shares were under solid pressure.

Dow member McDonald's Corp. (MCD $159) announced Q2 EPS of $1.70, versus the expected $1.62, as revenues decreased 3.0% y/y to $6.1 billion, above the forecasted $6.0 billion. Q2 same-store sales rose 6.6% y/y, north of the expected 3.7% gain. Shares rose solidly.

General Motors Co. (GM $36) reported Q2 earnings of $1.60 per share, or $1.89 ex-items, versus the forecast of $1.68, as revenues declined 1.1% y/y to $37.0 billion, excluding its discontinued European operations, which may have impacted the comparability to the Street's $40.3 billion expectation. GM closed slightly lower. 

Eli Lilly and Co. (LLY $82) posted Q2 EPS of $0.95, or $1.11 ex-items, versus the projected $1.05, as revenues grew 8.0% y/y to $5.8 billion, topping the estimated $5.6 billion. LLY increased its full-year guidance. Shares traded lower as the company also announced that it will delay the resubmission of a new drug application of its treatment for rheumatoid arthritis by at least 18 months.

Consumer Confidence unexpectedly jumps

The Consumer Confidence Index (chart) surprisingly improved to a four-month high of 121.1 in July from the downwardly revised 117.3 in June, and compared to the Bloomberg estimate of a 116.5 reading. Both sentiment toward the present situation expectations of business conditions for the next six months increased. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—rose to 16.1 from the 13.6 level posted in June.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.7% gain in home prices y/y in May, versus expectations of a 5.8% increase. Month-over-month (m/m), home prices were up 0.1% on a seasonally adjusted basis for May, below forecasts of a 0.5% gain.

The Richmond Fed Manufacturing Activity Index increased to 14 in July from June's upwardly revised 11 figure, with a reading above zero denoting expansion, and versus expectations of a 7 reading.

Treasuries finished lower, with the yield on the 2-year note rising 3 basis points (bps) to 1.39%, while the yields on the 10-year note and the 30-year bond rallied 7 bps to 2.33% and 2.91%, respectively. 

Today's data helped yields and the U.S. dollar stabilize after a recent bout of pressure. The Fed began its two-day monetary policy meeting but is not expected to make any policy changes tomorrow amid a lack of updated economic projections and a subsequent press conference by Chair Yellen, who recently offered a more dovish tone.

As noted in the latest Schwab Market Perspective: Are Danger Signs Rising…or Will the Bull Run Continue?, economic uncertainty has confounded the Fed, which may raise the risk of a policy mistake and/or bouts of market volatility, while putting the potential for another rate hike this year into greater doubt. We're sticking with our forecast for one more hike this year along with the start of a gradual reduction in their balance sheet, believing the latter could come before the former. The long running bull market continues to show remarkable resiliency and we expect that to continue. However, risks have risen and a pullback is likely but solid earnings growth should continue to support stocks. Read more on the Markets & Economy page at www.schwab.com and be sure to follow us on Twitter: @schwabresearch.

Bond yields are rebounding and the U.S. dollar remains under pressure amid heightened political uncertainty and mixed economic data, while the markets grapple with global monetary policy uncertainty.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer'in the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. Read more on the Fixed Income page at www.schwab.com, where Kathy also discusses, Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.

In addition to the aforementioned Fed rate decision, tomorrow the U.S. economic calendar will bring some housing data in the form of new home sales, expected to have increased 0.8% m/m in June after rising 2.9% the month prior, and weekly MBA mortgage applications.

Europe rebounds on data, Asia dips ahead of Fed meeting

European equity markets finished broadly higher, with financials leading to the upside as bond yields in the region recovered. With the Fed set to deliver its monetary policy decision tomorrow, the markets appeared to shrug off the continued strength in the euro versus the U.S. dollar, which has received a boost from expectations the European Central Bank is close to beginning to discuss tapering its stimulus measures. A plethora of upbeat profit reports out of the U.S. may have helped sentiment, along with an unexpected fresh record high in German business confidence for July. The British pound also gained ground on the greenback, while a report showed U.K. business optimism surprisingly improved for this month. For analysis of the global markets, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, latest article, An important benefit to global investors is back after 20 years on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. Finally, with political uncertainty festering, 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 as the markets await tomorrow's monetary policy meeting conclusion in the U.S., while eyeing the persistent pressure on the dollar and lingering political uncertainty in the world's largest economy. Also, the ramped up earnings season was in focus ahead of a plethora of U.S. releases, while traders digested yesterday's mixed global business activity reports. Japanese equities dipped as the yen recovered losses late in the session. Mainland Chinese stocks declined and shares trading in Hong Kong finished mostly flat. However, Australian securities advanced amid strength in major sectors of financials, basic materials and health care. South Korean and Indian equities dipped. Both of the countries stock markets retreated modestly from all-time highs. Schwab's Jeffrey Kleintop's CFA, offers his article, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Overon the International Investing page at www.schwab.com, where you can also find his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks.

The international economic calendar for tomorrow will yield small business confidence and PPI from Japan, CPI from Australia, the Consumer Confidence Index from Italy and the Index of Services from the U.K.