Stocks Unable to Hold Gains Following Tax-Reform Outline

Charles Schwab: On the Market

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

Stocks Unable to Hold Gains Following Tax-Reform Outline

U.S. stocks relinquished mild morning gains to finish mostly flat as investors digested the Trump administration's afternoon release of a rough framework regarding its tax-reform plan. Treasuries were higher, the U.S. dollar gained ground, crude oil prices were mixed and gold was little changed. A light economic docket showed that weekly mortgage applications rose, though the domestic calendar will heat up tomorrow. Equity news consisted mostly of quarterly corporate reports as earnings season continues to roll on.

The Dow Jones Industrial Average (DJIA) lost 21 points (0.1%) to 20,975, the S&P 500 Index decreased 1 point to 2,387, and the Nasdaq Composite was nearly unchanged at 6,025. In moderately-heavy volume, 963 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.06 higher to $49.62 per barrel and wholesale gasoline was $0.04 lower at $1.59 per gallon. Elsewhere, the Bloomberg gold spot price inched $4.91 higher to $1,269.04 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.2% higher at 98.94.

Dow member Boeing Co. (BA $182) reported 1Q earnings-per-share (EPS) of $2.34, or $2.01 ex-items, versus the $1.91 FactSet estimate, as revenues declined 7.0% year-over-year (y/y) to $21.0 billion, compared to the projected $21.3 billion. BA raised its EPS outlook and reaffirmed its revenue forecast for the full year. Shares traded lower on the revenue shortfall.

Dow component Procter & Gamble Co. (PG $88) posted fiscal 3Q earnings of $0.93 per share, or $0.96 ex-items, versus the projected $0.94. However, shares were lower as revenues decreased 1.0% y/y to $15.6 billion, compared to the forecasted $15.7 billion. PG maintained its full-year EPS outlook and increased its guidance for adjusted free cash flow productivity.

Dow member United Technologies Corp. (UTX $118) announced 1Q EPS of $1.73, or $1.48 ex-items, compared to the expected $1.39, with revenues rising 3.0% y/y to $13.8 billion, topping the estimated $13.5 billion. UTX reaffirmed its full-year EPS and revenue guidance that had midpoints below the Street's estimates. UTX traded higher.

Twitter Inc. (TWTR $16) posted a 1Q loss of $0.09 per share, or a profit of $0.11 per share ex-items, compared to the estimated $0.02, as revenues declined 8.0% y/y to $548 million, exceeding the expected $517 million. Active monthly average users also bested expectations and shares rallied.

PepsiCo Inc. (PEP $113) reported 1Q profits of $0.91 per share, or $0.94 ex-items, versus the projected $0.92, as revenues increased 1.6% y/y to $12.1 billion, topping the expected $12.0 billion. PEP reaffirmed its full-year EPS guidance. PEP traded lower as organic growth and margins missed slightly and its Frito-Lay volume decline appears to be surprising analysts.

U.S. Steel Corp. (X $23) announced a 1Q loss of $1.03 per share, or a shortfall of $0.83 per share ex-items, compared to the forecasted profit of $0.35, as revenues rose 16.4% y/y to $2.7 billion, below the estimated $3.0 billion. The company issued full-year earnings guidance that severely missed forecasts. The company said operating challenges at its flat-rolled facilities prevented it from benefitting from improved market conditions. Shares fell sharply.

Mortgage applications rise

The MBA Mortgage Application Index increased 2.7% last week, following the previous week's 1.8% decline. The rise came as a 7.2% jump for the Refinance Index more than offset a 1.0% decrease for the Purchase Index. The average 30-year mortgage rate declined 2 basis points (bps) to 4.20%.

Treasuries finished higher, with the yield on the 2-year note ticking 1 bp lower to 1.27%, while the yields on the 10-year note and the 30-year bond dipped 3 bps to 2.30% and 2.96%. Bond yields had rebounded recently following eased European political risk concerns after the French Presidential election and as earnings season has remained favorable. For analysis of the bond markets, see Schwab's Chief Fixed Income Strategist, Kathy Jones' article, Three Reasons to Own Bonds When the Fed is Raising Interest Rates on the Markets & Economy page at www.schwab.com. Follow Kathy on Twitter: @kathyjones. Also, Schwab's Vice President of Trading and Derivatives, Randy Frederick and Senior Fixed Income Research Analyst, Collin Martin, CFA, offer the video What's Driving the Ongoing Drop in Long-Term Bond Yields? on the Insights & Ideas page at www.schwab.com. Follow Randy on Twitter: @randyafrederick.

The markets awaited today's initial announcement regarding President Trump's tax-reform plans, which lacked complete details but is aimed at reducing the corporate tax rate to 15.0% and trimming the number of individual tax brackets to three from seven, with the top rate expected to be 35%. Amid this backdrop, political uncertainty remains elevated as discussed by Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend in his latest article, Congress Facing Possible Government Shutdown—Again, on the Insights & Ideas page at www.schwab.com.

Tomorrow, we will get a good look at some "hard" economic data in the form of the preliminary March durable goods orders report, expected to show demand for manufacturing continues to gain steam and rise 1.3% month-over-month, on the heels of the prior months' growth of 1.8% and 2.4%, respectively. However, after stripping out the more volatile components, growth is expected to be a bit more modest. Excluding transportation, orders are projected to increase 0.4%, after gains of 0.5% and 0.3% to begin the year, while the gauge of business investment, nondefense capital goods orders excluding aircraft, are expected to grow 0.5% after February's 0.1% dip and January's 0.2% gain.

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, ½ Full: Seeing Through a Weak Q1 economic surprises have faltered to the neutral level and hard data has been stubbornly weak relative to soft (confidence/survey-based) data, but leading indicators are not flashing any meaningful warning about growth. Read more on the www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Additional reports expected tomorrow include the advanced goods trade balance, forecasted to show that the deficit widened to $65.2 billion in March from $64.8 billion the month prior and pending home sales, expected to have decreased 1.0% m/m in March. The preliminary wholesale inventories report for March will be released and is anticipated to have increased 0.2% m/m, along with weekly initial jobless claims, expected to have ticked slightly higher to a level of 245,000 from the 244,000 the week prior. Rounding out the day we'll receive the Kansas City Fed Manufacturing Index, projected to have moved lower to 17 for April from 20 in March, though a reading above zero indicates expansion in activity.

Europe and Asia add to recent gains

European stocks slightly added to the recent rally that has come courtesy of a plethora of upbeat global earnings reports and eased political risk uneasiness. However gains may have been limited ahead of today's expected details of U.S. President Trump's tax-reform plans and tomorrow's monetary policy decision from the European Central Bank, which will likely be eyed to see if the aforementioned improved global landscape will have any impact on its policy stance. Political concerns have cooled as the French Presidential election over the weekend suggested pro-Europe, mainstream candidate Emmanuel Macron is poised to defeat anti-EU Marine Le Pen in the final vote on May 7th. For analysis of the European political front, which includes a recently approved U.K. vote and a German election later this year, see Schwab's Chief Global Investment Strategist Jeffrey Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy Frederick's videos, "Brexit" Underway: How Can Investors Prep Now That Article 50 Has Been Triggered? and Why Should the French Presidential Election Be Important to Investors? on the Insights & Ideas page at www.schwab.com. Also, check out Director of International Research, Michelle Gibley's CFA, article, Europe Votes: Could More Countries Reject the EU? on the International Investing page at www.schwab.com. The euro was lower and the British pound dipped versus the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished higher for a second-session, with the rally in the global markets continuing on a plethora of upbeat earnings reports, which joined eased European political risk concerns in the wake of the weekend's French Presidential election. Japanese equities posted a fourth-straight solid gain, with the yen continuing to slide on the eased concerns and earnings optimism, while tomorrow's monetary policy decision from the Bank of Japan appeared to have little impact on conviction. Stocks trading in mainland China and Hong Kong overcame lingering regulatory crackdown uneasiness to gain ground. Australian securities returned to action following yesterday's holiday to move to the upside, while a report showed the nation's consumer price inflation came in mostly cooler than expected. Equities in South Korea and India traded higher. Stocks shrugged off lingering geopolitical concerns aimed at North Korea, and Schwab's Jeffrey Kleintop, CFA, offers timely commentary in his article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, while he also delivers a look at the global landscape in his article, Top Five Trade Issues Investors Should Be Watching on the International Investing page at www.schwab.com.

In addition to the aforementioned monetary policy decisions from the European Central Bank and the Bank of Japan, tomorrow's international economic docket will yield industrial profits from China, import and export price data from Australia, CPI from Germany and consumer confidence from Italy and the Eurozone.