Stocks Notch Gains Amid Earnings, Upbeat Housing Data

Charles Schwab: On the Market

Posted: 7/19/2017 4:15 PM ET

Stocks Notch Gains Amid Earnings, Upbeat Housing Data

U.S. equities finished higher, despite uncertainty surrounding looming policy decisions in Europe and Japan. Morgan Stanley delivering upbeat results, but gains on the Dow were kept in check after IBM posted its 21st consecutive quarterly decline in revenues, and merger chatter within the media space gave those stocks a boost. Treasuries and the U.S. dollar were nearly flat following a rebound in housing construction activity, while crude oil prices were higher on another bullish government inventory report, and gold was modestly lower.

The Dow Jones Industrial Average (DJIA) rose 66 points (0.3%) to 21,641, the S&P 500 Index gained 13 points (0.5%) to 2,474, and the Nasdaq Composite increased 41 points (0.6%) to 6,385. In moderate volume, 708 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.73 to $47.32 per barrel and wholesale gasoline was $0.04 higher at $1.62 per gallon. Elsewhere, the Bloomberg gold spot price lost $0.83 to $1,241.64 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.80.

Morgan Stanley (MS $47) reported Q2 earnings-per-share (EPS) of $0.87, above the $0.76 FactSet estimate, as revenues rose 6.7% year-over-year (y/y) to $9.5 billion, topping the expected $9.2 billion. The company said its Q2 results demonstrated the resilience of its franchise in a subdued trading environment, aided by solid results from its wealth management and investment banking segments. Separately, MS raised its quarterly dividend by 25.0% to $0.25 per share, and announced a new share repurchase program of up to $5.0 billion. Shares were nicely higher.

Dow member International Business Machines Corp. (IBM $147) posted Q2 EPS of $2.48, or $2.97 ex-items, versus the expected $2.74, as revenues declined 5.0% y/y to $19.3 billion, below the forecasted $19.5 billion. IBM reaffirmed its full-year profit outlook. This was the 21st consecutive quarterly revenue decline as its cognitive solutions unit missed expectations and growth in its strategic imperatives decelerated. Shares finished lower.

United Continental Holdings Inc. (UAL $74) announced Q2 earnings of $2.66 per share, or $2.75 ex-items, compared to the expected $2.68, as revenues increased 6.4% y/y to $10.0 billion, roughly in line with estimates. The airline's passenger revenue per available seat mile (PRASM)—a key industry metric—rose slightly more than it had projected during the quarter. However, UAL's outlook for PRASM for the current quarter came in below estimates, pointing out weakness in airfares in Asia. Shares were solidly lower.

Vertex Pharmaceuticals Inc. (VRTX $160) jumped over 20% after the company announced favorable results from a study of a new triple-drug combination to treat cystic fibrosis.

Shares of Scripps Networks Interactive Inc. (SNI $77), owner of HGTV and the Food Network, rallied and cable network Discovery Communications Inc. (DISCA $27) gained ground amid reports that the two companies have held merger talks. Viacom Inc. (VIAB $36) also moved higher as it has been reported to have held discussions to combine with SNI. None of the companies mentioned commented on the reports.

Housing construction activity rebounds

Housing starts (chart) for June rose 8.3% month-over-month (m/m) to an annual pace of 1,215,000 units, above the Bloomberg forecast of a 1,160,000 unit rate. May starts were upwardly revised to an annual pace of 1,122,000. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, gained 7.4% m/m in June to an annual rate of 1,254,000, after May's unrevised 1,168,000 rate, and north of the expected annual pace of 1,201,000 units. Starts snapped a string a three-straight monthly declines and permits rebounded from drops in the prior two months, as activity in single-family and multi-family structures both grew m/m.

As noted in the latest Schwab Market Perspective: Smooth Sailing for Stocks?, economic data has been mostly positive and indicative of an ongoing expansion—albeit a mature one. Investors may be hoping for more of a speed boat look to economic growth, but we believe that pontoon speed, while not exciting, is likely to be more beneficial to keeping the bull market going. Read more on the Markets & Economy page at www.schwab.com.

The MBA Mortgage Application Index rose 6.3% last week, following the previous week's 7.4% drop. The increase came as a 13.0% jump in the Refinance Index was met with a 1.1% rise for the Purchase Index. The average 30-year mortgage rate remained at 4.22%.

Treasuries were little changed, as the yields on the 2-year and 10-year notes ticked 1 basis point higher to 1.36% and 2.27%, respectively, while the 30-year bond rate was flat at 2.85%.

Bond yields and the U.S. dollar have shown some weakness as of late as inflation has remained soft and Fed Chair Janet Yellen offered a dovish semi-annual monetary policy testimony last week. 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.

The political front remains in focus in the wake of yesterday's Senate healthcare bill failure, adding credence to Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend's Washington Midyear Update: 4 Key Issues for Investors to Watch, where he points out dysfunction, drama and ethical issues in the White House have combined with Republican infighting on Capitol Hill to bog down the policy agenda. There's growing concern among congressional Republicans that the much-anticipated policy changes will need to be significantly scaled back—or that they may not happen at all. Read more on the Insights & Ideas page at www.schwab.com.

Tomorrow's economic calendar will yield weekly initial jobless claims, with economists expecting a slight downtick to a level of 245,000 from the prior week's 247,000, as well as the Philly Fed Manufacturing Index, forecasted to decline to 23.7 for July from the 27.6 posted the month prior, while the Index of Leading Economic indicators (LEI) will round out the day, anticipated to have increased 0.4% for June following the 0.3% rise in May.

Europe higher ahead of monetary policy decision, Asia sees gains

European equities moved to the upside in late-day action, with the euro and British pound losing ground to the U.S. dollar, while bond yields in the region finished mixed. The markets eyed tomorrow's monetary policy decision by the European Central Bank along with earnings season on both sides of the pond, which continues to ramp up. Also, U.K. Brexit negotiations continued to move forward, and the markets digested heightened U.S. political uncertainty after yesterday's healthcare failure. For analysis of the political front see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, 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?. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick.

Stocks in Asia finished higher despite increased U.S. political uncertainty, with the markets digesting recent upbeat Chinese economic data and as earnings season ramped up, though monetary policy decisions from the Bank of Japan and European Central Bank are due out tomorrow. Japanese equities ticked higher, with the yen holding onto yesterday's advance, a rally in financials gave stocks in Australia a boost, while mainland Chinese securities and those listed in Hong Kong gained solid ground. For a look at the global markets, see Schwab's Jeffrey Kleintop's CFA, 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page at www.schwab.com. South Korean securities rose modestly to extend a record high run, while India's markets advanced, rebounding from yesterday's retreat from all-time highs. Amid this backdrop, check out 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.

In addition to the aforementioned monetary policy decision from the Bank of Japan and the European Central Bank, tomorrow's international economic calendar will be fairly busy and include trade data from Japan, employment figures from Australia, PPI from Germany, and retail sales from the U.K.