Stocks Modestly Higher in Lackluster Session

Charles Schwab: On the Market

Posted: 5/2/2017 4:15 PM ET

Stocks Modestly Higher in Lackluster Session

U.S. equities finished with only slight gains, as mostly positive results on the earnings front were tempered by another bout of disappointing monthly auto sales. As well, caution remained omnipresent ahead of tomorrow's conclusion of the Fed's two-day monetary policy meeting, while political uncertainty remained elevated. Treasury yields and crude oil prices fell, while gold and the U.S. dollar were little changed.

The Dow Jones Industrial Average (DJIA) rose 36 points (0.2%) to 20,950, the S&P 500 Index rose 3 points (0.1%) to 2,391, and the Nasdaq Composite added 4 points (0.1%) to 6,095. In moderately-heavy volume, 908 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil declined $1.18 to $47.66 per barrel and wholesale gasoline was $0.02 lower at $1.51 per gallon. Elsewhere, the Bloomberg gold spot price inched $0.39 higher to $1,256.97 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 98.98.

Dow member Pfizer Inc. (PFE $34) reported Q1 earnings-per-share (EPS) of $0.51, or $0.69 ex-items, versus the $0.67 FactSet estimate, as revenues decreased 2.0% year-over-year (y/y) to $12.8 billion, below the projected $13.1 billion. PFE reaffirmed its full-year outlook. Shares were lower as analysts expressed concerns about revenues as some of its key drug franchises missed expectations.

Dow component Merck & Co. Inc. (MRK $63) posted Q1 EPS of $0.56, or $0.88 ex-items, compared to the forecasted $0.83, as revenues rose 1.3% y/y to $9.4 billion, compared to the expected $9.3 billion. MRK raised its full-year guidance. Shares ticked higher as the Street digested mixed sales performances from its key drug franchises.

Aetna Inc. (AET $139) announced a Q1 loss of $1.11 per share, or earnings of $2.71 per share excluding costs associated with the termination of its merger agreement with Humana, versus the forecasted profit of $2.37 per share. Revenues declined 1.0% y/y to $15.5 billion, topping the projected $15.4 billion. AET raised its full-year EPS guidance, with a midpoint above estimates. Shares were nicely higher.

For analysis of our outlook for the health care sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, article, Health Care Sector Rating: Outperform, on the Markets & Economy page at www.schwab.com. Follow Schwab on Twitter: @schwabresearch.

Mastercard Inc. (MA $118) reported Q1 EPS of $1.00, or $1.01 ex-items, compared to the estimated $0.95, as revenues increased 12.0% y/y to $2.7 billion, roughly in line with forecasts. The company noted that strong revenue and earnings growth was driven by solid transaction volume levels this quarter, led by a noticeable gain in purchases out of its Asia Pacific, Middle East and Africa unit and a jump in Latin America. MA was higher.

Coach Inc. (COH $43) posted fiscal Q3 profits of $0.43 per share, or $0.46 ex-items, versus the projected $0.44, as revenues decreased 4.0% y/y to $995 million, compared to the forecasted $1.0 billion. Shares rallied as Q3 North American same-store sales rose 3.0% y/y, above the expected 1.6% gain. COH maintained its 2017 outlook.

The major automakers reported April sales today, with General Motors Co's (GM $33) sales declining 5.8% y/y, compared to FactSet's projected 1.2% decrease. Fiat Chrysler Automobiles NV's (FCAU $11) Chrysler sales were 7.1% lower, compared to the expected 6.1% fall. Ford Motor Co (F $11) reported a 7.2% drop in sales, versus the expected decline of 5.5%. Shares of the three automakers were lower. However, Toyota Motor Corp (TM $109) gained modest ground after announcing a 4.4% decrease in sales, compared to the 4.6% drop that was expected.

Fed begins policy meeting

Treasuries reversed to the upside in the wake of the monthly auto sales data and on the heels of a recent rebound in bond yields, courtesy of eased European political risk concerns and as earnings season has been mostly on the positive side despite elevated expectations. The yield on the 2-year note dipped 1 basis point (bp) to 1.27%, while the yields on the 10-year note and the 30-year bond lost 3 basis points to 2.29% and 2.98%, respectively.

Focus has turned to the Fed as the Federal Open Market Committee (FOMC) began its two-day monetary policy meeting today, with its statement due out tomorrow afternoon. Expectations are calling for the FOMC to leave the target for the fed funds rate unchanged but the wording of the statement will likely garner heavy scrutiny for clues to the timing of future rate increases. The meeting will conclude with no updated economic projections and will not be followed by a press conference by Fed Chairwoman Janet Yellen.

Ahead of the decision, the economic calendar will bring some key data points, with weekly MBA mortgage applications accompanying ADP's employment change release ahead of Friday's April nonfarm payroll report. However, the headlining morning data will likely be April reads on the pivotal U.S. services sector activity in the form of the ISM non-Manufacturing Index and Markit's Services PMI Index. ISM's report is projected to show growth accelerated slightly to 55.8 from 55.2 in March and Markit's Index is forecasted to show expansion decelerated slightly to 52.5 from the prior month's 52.8 level. Readings above 50 for both indexes depict expansion.

As noted in the latest Schwab Market Perspective: Should Sharp Sentiment Shifts Mean a Change in Strategy?, economic growth continues to muddle through and a recession doesn't appear imminent despite recent mixed data and inflation has been soft, so there is very little impetus for the Fed to move against a market which is expecting no action. Read more on the Markets & Economy page at www.schwab.com, where you can also find Schwab's Chief Fixed Income Strategist, Kathy Jones' article, Three Reasons to Own Bonds When the Fed is Raising Interest Rates. 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 a look at the bond markets in 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.

Finally, the U.S. political front continues to command attention, and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses What the Coming Tax Cuts Mean for the Stock Market on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. Moreover, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend and Randy Frederick offer the article, Trump's First 100 Days: Key Observations, on the Insights & Ideas page at www.schwab.com.

Europe higher, Asia mixed after holiday break

European equities finished higher, returning to action from yesterday's holiday, bolstered by some earnings, while eurozone and U.K. manufacturing reports continued to show expansion, with the former hitting a six-year high and the latter growing at the fastest pace in three years. The euro ticked higher and the British pound remained higher versus the U.S. dollar, while bond yields gained ground. The markets awaited tomorrow's monetary policy decision from the Fed, while the second round of the key French Presidential election is slated for this weekend. Also, Brexit negotiations continue ahead of a June U.K. vote, and an election in Germany later this year looms. For analysis of the political uncertainty on both sides of the pond, see Schwab's Jeffrey Kleintop's, CFA, and 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?, while Director of International Research, Michelle Gibley CFA, offers her article, Europe Votes: Could More Countries Reject the EU? on the International Investing page at www.schwab.com.

Stocks in Asia finished mixed as several markets returned to action from yesterday's holidays, digesting recent softer-than-expected manufacturing reports out of China, while political uncertainty remains and the focus is shifting to tomorrow's monetary policy decision in the U.S. Japanese equities advanced, with the yen extending its recent slide to help stocks ahead of tomorrow's national holiday. Mainland Chinese shares fell on the heels of the manufacturing reports, but those traded in Hong Kong gained modest ground, aided by some relatively upbeat earnings reports from the banking sector. Stocks in Australia dipped with earnings from the banking sector in focus, along with the unchanged monetary policy stance from the Reserve Bank of Australia, while listings in South Korea rose and India's markets finished flat. Geopolitical concerns continue to join the political uncertainty and see Schwab's Jeffrey Kleintop, CFA, offers his, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, while also delivering 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.

For tomorrow, the international economic calendar will offer employment data from Germany, as well as GDP and PPI from the Eurozone.