Stocks Continue Record Run, Fed Holds Steady

Charles Schwab: On the Market

Posted: 7/26/2017 4:15 PM ET

Stocks Continue Record Run, Fed Holds Steady

U.S. equities finished higher, tacking onto record highs, amid another string of mostly upbeat earnings reports, and after the Fed expectedly held steady in its monetary policy. Treasury yields fell following the Fed's decision and the U.S. dollar reversed to the downside, while crude oil prices added to recent gains in the wake of another bullish government oil inventory report. Gold finished higher.

The Dow Jones Industrial Average (DJIA) advanced 98 points (0.5%) to 21,711, the S&P 500 Index was nearly a point higher at 2,478, and the Nasdaq Composite increased 11 points (0.2%) to 6,423. In moderate volume, 826 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.86 to $48.75 per barrel and wholesale gasoline was $0.02 higher at $1.59 per gallon. Elsewhere, the Bloomberg gold spot price increased $10.80 to $1,262.61 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 93.50.

Dow member Boeing Co. (BA $233) reported Q2 earnings-per-share (EPS) of $2.89, or $2.55 ex-items, versus the $2.30 FactSet estimate, as revenues declined 8.1% year-over-year (y/y) to $22.7 billion, below the forecasted $23.0 billion. BA boosted its full-year profit outlook. Shares rallied.

AT&T Inc. (T $38) achieved Q2 EPS of $0.63, or $0.79 ex-items, versus the projected $0.73, though revenues declined 1.7% y/y to $39.8 billion, roughly in line with forecasts, due to declines in legacy wireline services and consumer mobility. However, the company's wireless subscriber additions trounced expectations. The company reaffirmed its full-year guidance. Shares of T gained solid ground.

Dow component Coca-Cola Co. (KO $46) posted Q2 profits of $0.32 per share, or $0.59 ex-items, compared to the expected $0.57, with revenues declining 16.0% y/y to $9.7 billion, roughly in line with forecasts. The company's organic revenue growth came in a bit shy of forecasts due to misses for Latin America and Asia, which met stronger-than-expected results in Europe, Middle East & Africa and North America. KO raised its full-year EPS guidance. Shares nudged higher.

Ford Motor Co. (F $11) announced Q2 EPS of $0.51, or $0.56 ex-items, versus the forecasted $0.43, as automotive revenues rose 0.3% y/y to $37.1 billion, below the expected $37.3 billion. Profits were lower than expected in North America and Europe. F issued full-year profit guidance that came in above expectations. Shares were lower.

Express Scripts Holding Co. (ESRX $63) reported Q2 earnings of $1.37 per share, or $1.73 ex-items, versus the projected $1.71, as revenues increased 0.5% y/y to $25.4 billion, below the expected $25.5 billion. The company issued Q3 EPS guidance with a midpoint above estimates, while raising its full-year profit outlook. Shares were nicely higher.

Advanced Micro Devices Inc. (AMD $15) posted a Q2 net loss of $0.02 per share, or profits of $0.02 per share ex-items, versus the breakeven forecast, as revenues rose 18.4% y/y to $1.2 billion, roughly in line with estimates. The chipmaker raised its full-year revenue guidance. AMD gained solid ground.

Fed stands pat, new home sales tick higher

As widely expected, the Federal Open Market Committee (FOMC) made no change to its monetary policy stance following its two-day meeting, noting in its accompanying policy statement that "near-term risks to the economic outlook appear roughly balanced," and that "household spending and business fixed investment have continued to expand." In its unanimous decision, the Committee provided little direction of any change to its current outlook for future rate increases, which beforehand showed that members have penciled-in one additional rate hike this year. However, Chairwoman Janet Yellen's dovish tone in her testimony before Congress earlier this month has many market participants hedging their bets on the future path of rate increases. Regarding winding down its balance sheet, the Committee only noted that it would commence such "relatively soon." No updated economic projections or post-meeting press conference by Chairwoman Janet Yellen were provided after the decision.

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, Yellen also bolstered the doves' case by noting that it is becoming more apparent that the "normal" level of interest rates may be below what it had been historically. Read the entire perspective, as well as Schwab's Chief Investment Strategist Liz Ann Sonders' insight into the Fed's decision in her article, Fed Keeps It on the QT, on the Markets & Economy page at www.schwab.com.

New home sales (chart) rose 0.8% month-over-month (m/m) in June to an annual rate of 610,000, below the Bloomberg forecast calling for 615,000 units, and compared to the downwardly revised 605,000 unit pace in May. The median home price decreased 3.4% y/y to $310,800. New home inventory ticked higher to 5.4 months of supply at the current sales pace. Sales jumped m/m in the West and Midwest but were flat in the Northeast and down in the South. Y/Y, sales are sharply higher in the Northeast and West, while down solidly in the Midwest and slightly higher in the South. New home sales are based on contract signings instead of closings.

The MBA Mortgage Application Index ticked 0.4% higher last week, following the previous week's 6.3% jump. The modest increase came as a 3.4% rise in the Refinance Index was met with a 2.2% decline for the Purchase Index. The average 30-year mortgage rate declined 5 basis points (bps) to 4.17%.

Treasuries turned higher following the Fed decision, as yields on the 2-year and 10-year notes fell 5 bps to 1.36% and 2.29%, respectively, while the 30-year bond rate lost 3 bps to 2.89%. 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.

Tomorrow's economic calendar will be fairly busy, beginning with weekly initial jobless claims, forecasted to increase to a level of 240,000 from the prior week's 233,000, followed by the June preliminary durable goods orders report, with economists anticipating a 3.7% m/m rise following the surprising 0.8% decline in May, while ex-transportation, orders are expected to have increased 0.4% m/m, and orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, are seen to have gained 0.3% m/m. Preliminary wholesale inventories for June are also on tap, with forecasts calling for a 0.3% increase, and the advance goods trade balance is expected to show that the deficit shrank in June to $65.5 billion. Rounding out the day will be the July Kansas City Fed Manufacturing Index, expected to remain at June's 11 level, with a reading above zero indicating expansion in activity.

Europe and Asia higher ahead of Fed decision

European equities finished higher, with the euro dipping from a recent rally that has been fueled by expectations the European Central Bank is close to starting to talk about tapering its stimulus measures. The markets awaited today's monetary policy decision in the U.S., while digesting a plethora of earnings reports that have been mostly better than expected. The British pound ticked higher, while the U.K. reported the preliminary look at Q2 GDP growth, showing growth slowed to a 1.7% y/y pace, from the 2.0% expansion posted in Q1. Bond yields in the region mostly nudged lower after a recent rebound. 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.

Stocks in Asia finished mostly higher following the upbeat earnings and economic data in the U.S., bolstered by the energy sector as crude oil prices continue to run, while the markets awaited today's Fed monetary policy decision. Japanese equities rose, as the yen lost some ground, and stocks in mainland China and Hong Kong ticked higher, while Australia's markets were sharply higher. Meanwhile, Indian listings also gained ground, notching a new all-time high, but securities in South Korea gave up early gains and finished lower. For more insight into emerging markets, Schwab's Jeffrey Kleintop CFA, offers his 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.

Tomorrow's economic calendar from abroad will include trade data from Australia, GDP from South Korea, housing prices from the U.K., consumer sentiment from Germany, and employment data from Spain.